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Evolution and Growth of Supply chain
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
By Guta Mengesha(MBA, MA)
Ethiopia
Email: gutamengeshadinagde@gmail.com
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Slide outline
 Definition of Procurement
 Procurement process
 Different functional names of procurement
 Total cost of ownership (TCO)
 Impact of procurement on cost and revenue
 Procurement as a profession
. Supplier relationship management
.Strategic sourcing
.Category Management
. Contract Management
. Negotiation
 Key procurement trends
 Spend Alaysia
 Supply segmentation form buyer and seller prospect
 KPIs in procurement
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement:
It is act or action involved in obtaining of good and/or service for the lowest Total cost of
ownership (TCO). Source: Chartered institute of procurement and supply
Procurement” means acquisition by way of purchase, lease, license or otherwise, either using public funds or any other
source of funds (e.g. grant, loans, gifts, private investment etc.) of goods, works or services or any combination
thereof. Source NTEP guidance and training material.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement Process
• Need Assessment
• Market analysis: collection and analysis of supply market data from manufacturing process, published data, trade
fairs, supplier annual report, Gov and industry statics for the aim of insight to investment to be made, Risk involved
and capability of potential suppliers
• Supplier selection: Tool :Gozzian curve
• Portfolio Analysis: classify items Tool: Kralijic Matrix
• Risk management: up to this is called sourcing activities before signing a contract.
• Order fulfilling
• Receive and payment
• Supplier Performance: Supplier relationship analysis( how they perceive buyer) and Supplier development(
alternative when supplier incapable of meeting your needs like re-source, outsource, produce internally, improve
supplier performance
• Quality management
• Cotinus improvement: activities after contract is called operational procurement
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PROCUREMENT PRINCIPLES
• All procurement should be subject to competition. A competitive process provides the best opportunity for value for money
• Value for money includes both whole life costing and quality.
• Sustainability issues can be considered where appropriate and when relevant. This must be balanced against cost and
affordability. Sustainability issues should be addressed in the planning stages. In some instances, particularly where
environmental issues are relevant, sustainable procurement can reduce whole life costs and improve quality through recycling
or reducing disposal costs
• All procurement should be fair, open and transparent. All contracting authorities should be seen to be acting in a fair manner.
A well-managed purchase, with a well-defined requirement from the onset, will help enable a successful result
• Requirements definition and procurement strategy: Your strategy should set out the key objectives and justification for the
purchase. You should also have a clear sourcing strategy and have considered the options for leveraging existing contracts and
collaboration opportunities.
• Market Assessment/Market creation :There may potentially be limited response to a requirement because of its nature or the
state of the market. In these cases, the organization should stimulate the market.
• Producing the requirement: Requirements need to be clear and unambiguous. An inadequately thought through requirement is
a common reason for procurement not providing the right goods or services, or. Requirements should be defined in as much
detail as possible, though there may be cases where you can only develop a full requirement during the procurement process.
From the onset, broad parameters should be set that establish what the organization can or will tolerate from its purchase.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PROCUREMENT PRINCIPLES
• Supplier selection:
Start the supplier selection and evaluation process early. This can begin with pre-qualification. Clearly define, plan and document your
approach from the start, ensuring a fair and transparent process can be demonstrated. Supplier selection and evaluation should be a
continuous process, each passing through a number of stage gates
• Proposal evaluation
Evaluation is a stage gate hurdle; it passes every supplier that, at the particular stage, meets all the criteria required of
them. It picks no favorites and does not prejudge the outcome of the overall process.
Follow your pre-defined evaluation model and criteria. For additional information on developing evaluation criteria
• Contract preparation
Match the contracting process with the nature of the purchase. Take into account complexity, size, and value.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PROCUREMNNT PRINCIPLES……
• Bid evaluation
Evaluate the financial and qualitative elements separately, then review the results together to reach the trade-off (if one has to be made) that
represents best value for money. For additional information on bid evaluation
• Award
Unsuccessful suppliers may require more attention than successful ones. You need to retain their interest and goodwill for the future, convey
lessons that will enable them to submit stronger bids, build relationships and networks and maintain transparency. Your chosen supplier may fail
and at this moment there is no more qualified alternative than the supplier that came second in the selection process.
• Procurement project closure
Close each purchase in a controlled way. Capture the lessons you have learnt. Analysis should capture how well the organization and process have
performed against aims and projections, especially planned costs, schedule, tolerances and business case.
• Implementation and transition
There should be a clear transition process from the procurement stage to contract management — it is important to ensure the organization
understands and fulfils its obligations so as not to delay or derail implementation.
By Guta Mengesha,Ethiopia
Evolution and Growth of procurement
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Growth of procurement
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Different functional names of procurement
Strategic Sourcing
Supply Chain Department
Supplier Relationship management
Negotiation
Category Management
Contract Management
Value management
By Guta Mengesha,Ethiopia,kk
Evolution and Growth of Supply chain
SUPPLIER RELATIONSHIP MANAGEMENT
WHAT IS SUPPLIER MANAGEMENT?
It is important that the company engages properly with its suppliers, establishes a proper relationship, manages the
requirements, and communicates effectively about them to the vendors.
A comprehensive supplier management policy is essential.
This process of supplier management recognizes the value of the contractor’s contribution.
It then builds and manages a relationship with the contractor to sustain that contribution and improve suppliers
performance and supplier relationships.
Supplier Management Dashboard and Reports by Simfoni Analytics evaluates if the suppliers are performing as per the
organizational requirements and help identify areas of improvement while engaging with suppliers throughout their
lifecycle. The report enables companies to evaluate and select suppliers, negotiate future contracts, and evaluate supplier
performance. The Supplier Management Dashboard provides a detailed report on each supplier by spend category, spend
trends, spend transactions by Business units, and payment terms.
The advance filters can help deep dive by PO, Non-PO, contracted or non-contracted, supplier diversity, and so on.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
What is Supplier Relationship Management (SRM) actually mean………….
Supplier Relationship Management (SRM) is the systematic approach of assessing suppliers’ contributions and
influence on success, determining tactics to maximize suppliers’ performance, and developing the strategic
approach for executing these decisions. As part of vendor mangement supplier relationship management is
where companies segment their suppliers and determine important supply categories, in order to devise strategies
capable of managing their suppliers and supplies more effectively.
Supplier relationship management is comprised of three main steps as follows:
1.Supplier Segmentation : is differentiating suppliers as a means of identifying risks and opportunities.
2. Supplier strategy development: Devising an optimal way to interact with suppliers based on business goals and
needs.
3. Supplier strategy execution: Executing the designed strategy, at the previous step, in an effective way to obtain
desired results in line with the company's goals.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
What is Supplier Relationship Management (SRM) actually mean
Takeaway
Supplier relationship management is important because a long-term relationship between your organization and its
suppliers allows for the free flow of feedback and ideas. Over time, this will create a more streamlined, effective
supply chain that will have a positive impact on costs and customer service.
By Guta Mengesha, Ethiopia
Evolution and Growth of Supply chain
The supplier management process is used to centrally review and manage the relationship with
each contractor which is owned by an individual.
• It provides value for money to all the parties involved and benefits the entire supply chain
• It ensures that the targets in all the contractor agreements and contracts are resource aligned with the
needs of the business and within the service level agreements.
• It ensures the seamless delivery of quality services which are aligned to the expectation of the
business.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
The Purpose of Supplier Management?
The main purpose of supplier management is to get adequate returns for the money spent on the vendors and provide
seamless quality of service to the business.
The main objectives for this are:
• To ensure that maximum value for money spent is obtained from all the vendors and contracts.
• To make sure that the underpinning contracts (UCs) and agreements with the suppliers are in line with the business
needs and agreed on targets of the organization.
• To manage the supply chain and relationships with the various vendors and monitor their performance by keeping
accurate records.
• To negotiate with the suppliers, finalize contracts, and manage them throughout their lifecycle.
• To establish and maintain a policy regarding suppliers and also to maintain a supporting Supplier Contract
Management Information System.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Supplier Management
Is key element in procurement and it involves:
A. Registration or Pre-qualification of suppliers
B. Supplier Relationship management
C. Performance management
.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
STRATEGIC SOURCING VS CATEGORY MANAGEMENT
Strategic Management in procurement
➢ It is the a procurement process aimed at selecting the right suppliers and negotiating the best
price to meet business objectives.
➢ It is component of supply chain management focused on spend optimization.
➢ Its primary goal is cost reduction
➢ Help deeper supplier audit that determine which supplier best the company’s needs and allow
to stay aware of latest supplier developments and new supplier coming to market.
➢ Strengthen supplier relationship as more attention is placed on strategic selection
➢ It allow for regular contract analysis
➢ The RFP process is revised to ensure contract in place have competitive and lowest price
➢ With out it a contract the automatically renew have an ”Out-of-sight, out-of-mind effect” that
leads to missing of opportunities for innovation.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
STRATEGIC SOURCING VS CATEGORY MANAGEMENT
Benefit of strategic sourcing cont…
➢ Maximizing value for the organization
➢ Overall procurement cost reduction
➢ Improvement of the quality of products or services
➢ Optimization of an organization’s inventory
➢ Convenience and improvement of lead time
Customized steps to implement strategic sourcing
1. Evaluating sourcing needs
2. Analyzing current spend
3. Performing market research to identify potential suppliers
4. RFP process and supplier selection
5. Contract negotiation
6. Evaluation and optimization
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Strategic procurement should be implemented in three broad steps:
• Value chain positioning (VCP) – the process by which the organisation positions itself in the
market to reflect a margin cost analysis of all the supply and value relationships within their
market.
• Market positioning analysis – this is where the organisation comes to understand the value
creation and costs aspects of its own supply chains and how this compares to competitors.
• Extended relational competence approach – This is where the organisation creates supplier
and customer relationships that are underpinned with a solid idea of how value is created, what
contracts should look like, how to install efficient boundaries and how best to exploit core
competencies.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Elements of strategic sourcing
I. Supplier Management
II. Demand Management
III. Total cost of ownership
IV. Sustainability
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
CATEGORY MANAGEMENT
• The most popular topics in the Procurement world which is said to be ‘Category Management’.
• Category Management is a strategic approach to procurement where businesses segment their spend into areas that
contain similar or related products enabling focus opportunities for consolidation and efficiency.
• ‘’Category Management is the strategy of cost management and strategic supplier relationship management within an
organization.’’ by Shanon
• It is a strategic approach to procurement where businesses segment their spend into areas that contain similar or
related products enabling focus opportunities for consolidation and efficiency. CPIS
• Is used for efficient spend management and cost savings.
• It involves the categorization of various goods and services and managing them as business units (BU) with the purpose
of effectively and efficiently improving business outcomes.
• It employs a structured and measurable project management approach to achieve these improved outcomes.
• a general rule of thumb applies that products or services with similar characteristics are placed in one group. A few of
these categories include: Information technology, Security, Medical, Office management, Industrial products/services
• Once the categories have been identified, the organization can create a tailored strategy to meet their objectives. An
analysis of current spend, pricing, and supplier performance will determine the best way to optimize the category.
By Guta Mengesha, Ethiopia
Evolution and Growth of Supply chain
Benefit of category Management
o Centralizing Spend Data: Category management enables easy tracking, logging, and reporting due to
consolidated and centralized spend. It also allows for the outsourcing of spend analysis.
o Cost Savings: By leveraging the expertise of strategic managers, knowledge of categories and
subcategories not only adds value but also minimizes cost.
o Better Vendor Risk Management: Since category management allows the organization to gain
comprehensive knowledge of their suppliers, they can use one supplier’s operational risk to benchmark
others, thereby maintaining a better risk management strategy.
o Purchase to Pay Process: By perfecting its operational processes with one supplier, the organization can
duplicate these processes for others in the same category without creating entirely new ones.
o Streamlined Business Strategy: It also plays a key function in the strategic management of businesses.
It can aid the expansion of a particular business operation if the need arises.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Category Management……….
Advantages of category management
• Allows procurement professionals to focus on their time to conduct market analysis to fully leverage their negotiations
• Helps to correctly manage suppliers to align with corporate objectives
• Enhanced supplier relationships
• Gain an in depth understanding of how each category contributes to risk management through market analysis
• Enhances the customer experience as organization's will be able to focus on one category and look at promotions and
product availability.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Category Management………
Disadvantages of category management
It relies on the good communication and collaboration with suppliers, which can sometimes be difficult..
The seven steps within category management include:
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Category Management process
The process is highly fluid and often simplified to expedite results, but generally follow this framework:
✓ Analyze current spend to identify categories
✓ Define goals, KPIs, and objectives for each category
✓ Develop a master strategy to achieve each category’s goals
✓ Break the strategy down into specific tactics and phases
✓ Launch and implement strategy
✓ Evaluate and optimize.
By Guta Mengesha, Ethiopia
Evolution and Growth of Supply chain
Enablers of Category Management
By Guta Mengesha, Ethiopia
Evolution and Growth of Supply chain
Difference between strategic sourcing and Category managenent
Variables Strategic sourcing Category Management
Nature Process Strategy
Focus Spending less within supply
channels
Value and goal based objective like
buying lesser or smarter
End result Leads to an overall spend
optimization
Leads to an overall supplier optimization
Competency Functional Strategic
Horizon Short Term/one time event Long term/end-to-end process
Approach Event/process based Context
Program No supplier development, no
typical demand management
Supplier development, demand
management
Commodity Single category Portfolio category
Executive support Passive Proactive
By Guta Mengesha, Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION
In a Florida State University study titled A Skills-Based Analysis of the World-Class Purchaser, Larry C.
Giunpiero, Ph.D., found that negotiation skills were crucial in achieving an organization’s goals of
improved quality, price delivery, and service.
Negotiation:
It is a conversation to reach an agreement. Procurement negotiation is a process by which professionals
engage with each other to create agreeable terms for a contract.
Negotiation is ‘coming to an agreement’. It is necessary as ‘the process by which agreements are
reached, by parties with different and potentially divergent interests, is a complex one” (Chartered
Institute of Purchasing & Supply, 2012) 2 .
“In a procurement context, negotiation is a process of arriving at an agreement on the conditions of a
contract, through discussions between buyer and seller:
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION……..
Negotiation is a fact of life’. Everyone negotiates something every day. “In particular those involved with
the procurement function. skills in negotiation are highly valued in the pursuit of commercial ‘value for
money’ outcomes. (Chartered Institute of Purchasing & Supply, 2018)
Both parties typically discuss pricing, payment, delivery date, and timeline. Ideally, the negotiations should
consider the best options for both parties to build strong relationships that lead to long-term business.
Ultimately, this creates a win-win result for both parties.
In reality, procurement negotiations don’t always work out so easily or successfully. Those who enter into
the negotiation often might not think about what’s best for everybody. Instead, they may be thinking about
what’s best for themselves.
With that in mind, it’s important to learn all you can about who you’re negotiating with and their true
objectives. A good way to do that is to understand the different styles of negotiation that people use. That
way, you're ready for whatever comes your way.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION……….
FIVE STYLES OF NEGOTIATION
1.COMPETITION: Negotiators who use a competition style value the negotiation outcome more
than the relationship between the two parties. Negotiators who use this style are looking to win the
negotiation and want the other party to lose. Usually, negotiators who favor this style will do
anything to get the win.
2.COLLABORATION: Collaborators value outcome and relationship equally because they believe
both are important. They want a win-win outcome and a long-term relationship. And they'll work
hard to achieve both.
3.COMPROMISE: While compromisers value outcome and relationship, they are willing to sacrifice a
little of each to reach an agreement. They believe in winning some of what they want while losing
a little bit of it.
4.ACCOMMODATION: Accommodators value the relationship more than the outcome and are
willing to lose the negotiation. The result is a “you win, and I lose” style. This is the opposite of the
competitive style.
5.AVOIDANCE: With this style, the negotiator doesn't value the outcome or the relationship. It can
simply be considered a “lose-lose” model with the party withdrawing from the negotiation
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION………….
5 Styles of Negotiation
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION………….
5 Styles of Negotiation
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION…..
Seven Stages of Procurement Negotiation
1.Preparation: Thorough preparation is extremely important. This is when you acknowledge your
negotiation style first. Then, you decide on the relationship and outcome you expect to achieve with
the other party. You should also research the other party and, if possible, learn what negotiation style
they typically use.
2.Opening: During the opening, the parties state the goals of the negotiation. This is when you can
discover if the relationship and outcome expectations match.
3.Testing: As the name implies, both parties are “testing” each other to understand each party's
values. Good communication and listening skills are key to this step. Paying attention during this
stage can help you find opportunities.
4.Proposing: Both parties propose what they expect to achieve at this stage. It’s also a time when you
and your team may want to think about modifications to your strategy based on the proposal from the
other party.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION…..
Seven Stages of Procurement Negotiation……
5. Bargaining**: Based on what has been said, both parties should offer compromises if needed. Ideally,
any compromises should be equal and agreeable to both parties. For example, look for opportunities to cut
procurement costs on both sides. This way, everyone's paying the optimal price for the good or service.
6.Agreement: Once compromises are reached, the parties can make an agreement. When both parties
accept the agreement and sign, the procurement contract becomes a legally binding document.
7.Closure: Both parties receive documentation and contracts from the previous stages for their records.
After this stage, the negotiation is complete.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
NEGOTIATION
Reasons for negotiation
➢ It ensure potential supplier understand requirements
➢ It avoid the possibility of litigation
➢ It exert the control over the manner in which the contract
is performing
➢ It reduce risks
➢ It improve benefits like better quality, performance delivery
➢ It helps to overcome problems and challenges that might
arise during course of contract
➢ It help to achieve value for money
➢ Foster sound continuing relationship
➢ Eliminate unnecessary cost
➢ Create better understanding and relationship with suppliers
➢ Gain knowledge of supplier products, capabilities,capacities
and process.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Contract Management
Contract management is the means of managing contract creation, execution, and analysis to maximize operational
and financial performance at an organization, all while reducing financial risk.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Contract Management
Allocate expert and dedicated contract management for the term of the contract. You need to have robust procedures, with
people to manage the contract. The management provisions should be built into the contract. The level of contract
management you need will depends on the type of contract. Inadequate planning for, and carrying out of, contract
management is a crucial reason for user dissatisfaction and not realizing value for money. It is important to have continuity in
the relationship and for the contract managers from both the procuring organization and the supplier to have been appointed
early in the process.
Match the contracting process with the nature of the purchase. Take into account complexity, size, and value. You should be
able to answer 'yes' to the following questions.
• Does the contract accurately represent the requirement?
• Have stakeholder requirements and views been taken into account?
• Do potential providers have realistic solutions to meeting the requirement?
• Does the organization have the necessary skills and resources to meet its obligations under the contract and for managing
the contract?
• Have you had appropriate, expert legal advice? • Has the future contract manager been involved in the process?
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
TOTAL COST OF OWNERSHIP(TCO)
To fully understand what you are paying for equipment, you need to evaluate the Total Cost of Ownership (TCO),
which is an estimation of all the collective expenses associated with purchasing and operating a piece of equipment.
The TCO will provide a way to compare pieces of equipment “apples to apples.”
The price tag can cause much confusion because it reflects one small part of the big picture. Some sources say that
the amount on the price tag represents less than 10 percent of the total cost spent on a piece of equipment over its
lifetime.
In fact, energy costs, maintenance, and repair fees are predicted to have at least five times more relevance than the
upfront cost. But, few consider these factors as part of the price during their selection process.
TOC Formula
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Total cost of ownership(TCO)……
I = Initial cost: The initial cost is the number that appears on the price tag.
O = Operation: Operation is the cost to install the asset, test the asset, train employees to run the asset, and
the cost of energy to operate the asset.
M = Maintenance: Maintenance includes the cost of regular repairs such as cleaning, inspecting, lubricating,
and adjusting the asset to make sure it is in optimal condition. This also includes reactive maintenance when
the equipment breaks down unexpectedly.
D = Downtime: While you could include downtime along with the cost of maintenance, it is often so large that it
warrants its own category. Downtime involves the labor costs of employees whose work is delayed, indirect
labor costs from supervisors who address the issue, lost production, and lost customers from inability to meet
time expectations.
P = Production: Two different assets will likely have different levels of output, produce different qualities, and
have different environmental implications.
R = Remaining value: The remaining value has to do with the asset’s longevity. How much will the asset be
worth in 5 or 10 years? It can be a big difference.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Total cost of ownership(TCO)
This formula can sound a little overwhelming, but let’s start simple.
I + M – R = TCO
For this example, we will start with three variables to compare two hypothetical of assets: Asset A and
Asset B. The variables chosen are initial cost (I), maintenance costs over 5 years (M), and the remaining
value after 5 years of depreciation (R).
• Asset A has an initial cost (I) of $10,000.
• Asset B has an initial cost (I) of $20,000, twice the upfront cost as Asset A.
By Guta Mengesha,Ethiopia
Asset A Asset B
Initial cost $10,000 $20,000
+ Maintenance $5,000 $2,000
- Remaining value $2,000 $10,000
= TCO $13,000 $12,000
Evolution and Growth of Supply chain
Total cost of ownership(TCO)
Based on initial cost (I) alone, Asset A would be the clear choice. However, the TCO can tell us a lot more
about which option is best.
The TCO of Asset B is less than Asset A even though its initial cost was twice as much.
We will go with a conservative estimate and of $50,000 per hour, even though downtime will likely be a lot
more.
Since $163,000 – $62,000 = $101,000, Asset B costs $101,000 less than Asset A. The price gap
becomes wider with every variable that you add, giving you a clear choice for cost value.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
KPIs (key performance indicators), also called metrics, are designed to measure the performance and
effectiveness of procurement management. Procurement may affect product quality, costing, timely
delivery, and customer satisfaction. So it is important for organizations to monitor and improve,
performance and health of procurement. Procurement KPI metrics help organizations to track and
report performance and effectiveness of procurement in meeting business objectives.
Are broadly classified in to four KPI
1.Quality KPI: measure quality of good, work, service you procure
2.Inventory KPI: measure the efficiency of your inventory management
3.Delivery KPI: measure the timeliness and reliability of deliveries
4,Cost saving KPI- the money saved
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix -image
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
Is a measurable value that tracks all relevant aspect of obtaining or purchasing goods and services. It helps procurement
department to control and optimize the quantity, quality , cost timing and sourcing of purchasing process. (By
Rakotomola)
1. QUALITY KPI’S
A. COMPLIANCE RATE (C.R) :
❑ Is a measure of how well supplier adhere to term of their contract with buyers.
❑ To ensure legal security, businesses need to be in contractual and policy compliance.
❑ To improve the compliance rate, businesses can turn to a foolproof purchasing contract that clearly outlines all
penalties in the event of a breach.
❑ Are the ratio of disputed invoices to total invoices, as well as the total difference between the paid and quoted prices.
❑ A high compliance rate means fewer disputes, delays and extra expending
❑ A low compliance rate means more problems and inefficiencies
C.R= Number of supplier’s meeting the requirement X 100
Total number of supplier
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix…….
B. PURCHASE ORDER ACCURACY (P.O.A)
❑ It measures how well supplier meet the buyer’s expectation
❑ It allows if the orders are correct and timely
❑ It is determined by comparing the actual deliveries with agreed terms
❑ Higher P.O.A benefits the buyer with lower cost and improved efficiency.
❑ A low purchase order accuracy will typically increase the company's operating costs.
❑ This specific metric will help organizations keep an eye on whether their suppliers are delivering the right orders
and if these deliveries are on time.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix……………
C. SUPPLIER DEFECT RATE (S.D.R)
❑ It measures the proportion of faulty or substandard products from a supplier
❑ It helps to identify the type of defects and their root courses
❑ By measuring the supplier defect rate based on defect types, procurement professionals will be
able to generate actionable insights regarding each supplier's overall trustworthiness.
❑ The supplier defect rate is a representation of the total number of substandard products over the
total units tested.
❑ It typically expressed as defects per million
❑ S.D.R = Total number of substandard products x 100
Total number of unit recieved
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix…………
2.INVENTORY KPI’S
A. INVENTORY TURNOVER RATIO (I.T.R)
❖ It shows how efficiency a company sells and replace its inventory in a given place.
❖ Higher ration indicates improved inventory planning or inventory sold more quickly and
efficiently.
I.T.R= Cost of good sold
Average inventory level
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix……….
B. INVENTORY AGING
❖ It indicate Report tells us how many days an item is in inventory
❖ Report represents a list of all the items on hand that are grouped based on the period of time spent in inventory.
❖ It helps to spot slow moving inventory and associated storage cost
❖ High inventory aging means capital tied-up in stock
❖ A higher inventory aging reflects the blockage of certain working capital in the form of inventory.
Average age of inventory= Average cost of inventory at its present level X 365
Cost of good sold
C. INVENTORY CARRYING COST (I.C.C)
❖ It refers to the expense of holding inventory over a certain period of time
❖ This includes the cost of space such as rent, electricity, equipment, salaries, inventory shrinkage or losses, etc
❖ The more products in stock, higher the inventory carrying cost. It is overhead cost
❖ I.C.C = Inventory holding cost X 100
The total value of the inventory
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
3.Delivery K.P.I’s
A. SUPPLIER LEAD TIME (S.L.T)
➢ It measures the time between order placement and shipment by supplier
➢ This matrix refers to the efficiency of the purchasing process
➢ Is typically measured in days and starts with the availability confirmation and order, and ends with the delivery.
➢ Shorter lead times are preferred, as long as quality remains uncompromised.
➢ For example, if you place a PO on January 1st and receive the goods or services on January
10th, your lead time would be 10 days.
S.L.T= Delivery time – Purchase order acceptance time
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix………..
B. PURCHASE ORDER CYCLE TIME ( P.O.C)
➢ It measures the time it takes to fulfil an order from requisition to delivery
➢ It is time between receipt of purchase requisition to releasing a purchase order to the vendors.
➢ It measured from the moment a purchase requisition is submitted to the time when it's sent to a vendor
➢ It also indicates supplier’s delivery speed and indicates the preparedness of the procurement team.
➢ It is the time it takes to create the PO , approve it, send it to the supplier, and receive the goods or services.
➢ It reflects how efficiently the procurement team is able to execute intermediate tasks such as sending
RFQs, receiving and comparing quotes, approvals, etc.
➢ Shorter purchase order cycle time confirms an efficient procurement strategy.
➢ The supplier with shorter cycle time are ideal for urgent orders
P.O.C= Po delivery date(time order received by customer)-order date(time order placed)
Total number of orders shipped
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
c. Vendor availability (V.A)
❖ It measures a supplier ability to meet urgent needs and indicate their reliability.
❖ It calculates the ratio of available items to total orders placed
❖ A supplier availability of 90% or higher indicate a strong and efficient supply chain performance
V.A= Number of times items area available with vendor
Total number of orders placed with the vendor
D. Emergency purchase ratio (E.P.R)
❖ This quantifies the frequency of urgent orders placed by the company
❖ Is measured by comparing the emergency purchases to the total number of purchases made over a given period of time
❖ Are unplanned orders that are made so as to avoid any product shortages
❖ Lowe numbers signify improved planning and efficiency
E.P.R=the number of emergency purchase
Total number of purchase over fiscal period of time
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
4.COST SAVING K.P.I
A. PROCUREMENT ROI
• It measures the financial gain from the procurement activities relative to the
investment
• It calculates how efficiently procurement contribute to financial performance
• Is a ratio between the annual cost savings and the annual procurement cost.
P.ROI= Annual cost saving
Annual procurement cost OR
Procurement ROI = (Cost Reduction + Cost Avoidance)/Cost of Procurement Operation
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix…..
B. COST REEDUCATION
• It measures a percentage of saving achieved through negotiation , finding alternative supplier, reduce
maverick spending and discounts on purchases
• Is a central procurement KPI
• It is utilized to plan the company’s budget and spending as part of long-term cost management strategy.
• It measures the tangible hard savings that were achieved over the years through cost management
techniques.
• You can measure this KPI by comparing the old costs with the new costs for the same good or service
• It is determined by comparing the previous and current price for identical items.
• It is also called hard savings.
• Cost Reduction = Actual Purchasing Price – Last Price Paid or (Procurement costs in the previous period – procurement
costs in the current period
• For example, if your procurement costs in the previous period were $100 million and your procurement costs in the
current period are $90 million, your procurement cost reduction would be $10 million
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix….
C. COST AVOIDANCE OR SOFT SAVING
✓ Refers to how the procurement team prevent or mitigate potential future additional costs.
✓ These are savings from the actions taken to reduce future task
✓ Although not quantifiable , still contribute to cost saving as companies can track metrics such as the number of late deliveries,
quality defects, and supplier failures to identify areas where cost avoidance occurs
✓ One effective way to avoided costs is to secure long term contracts that stabilize price and prevent fluctuations.
✓ Is the amount of money a company saves on its procurement costs by avoiding potential problems, such as late deliveries, quality
issues, or supplier failures
✓ These do not appear directly in the company's bottom line in any tangible or quantifiable way; nevertheless, these can
still have a positive impact, even if they don't directly impact the income statement.
✓ It often targets strategic spend such as new technologies or investments that have no terms for comparison
✓ Few examples are rate contracts or price protection, negotiation after initial quotes, asking for value-adds such as add-on services,
continuous improvements for saving, finding substitutes
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix………
D. SPEND UNDER MANAGEMENT (SUM)
✓ It optimize expenses by ensuring negotiated prices are consistently applied.
✓ It is the percentage of a company’s procurement spend managed through its approved supplier network.
✓ The SUM represents the difference between the total approved spend such as direct, indirect, and service-related
costs, and the Maverick spend.
✓ It covers strategically managed spend and negotiated rates with suppliers
✓ Consolidated purchase and negotiating bulk discount can result in substantial saving.
SUM=Total procurement spend – maverick spend X100
Total procurement spend
Example if total procurement spend is $100 million and your maverick spend is $10 million SUM
is 90%
.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix…….
E. PRICE COMPETITIVENESS
✓ Minimal vendor competition will oftentimes lead to a supplier monopoly.
✓ Is the ability of a company to obtain goods and services at competitive prices
✓ Over the long-term, this can lead to lower-quality services and fewer growth opportunities.
✓ The focus is placed on shortlisting vendors that offer a competitive advantage.
✓ This can be measured by comparing a company’s prices to those other companies pay for the same goods and
services.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
Other Relevant KPI
5. EMPLOYEE LEARNING AND GROWTH KPI
Number of employees with certification, training investment per
employee
6. SUPPLIER RATINGS
➢ This KPI evaluates the performance of suppliers on various parameters. Few key parameters can be
response rate, on-time delivery of material, quality of material, invoice accuracy.
➢ It helps in identifying strong and weak suppliers.
➢ Companies can use supplier ratings to identify, reward and retain well-performing suppliers and to
identify, take corrective action regarding weak suppliers
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix
Other Relevant KPI……………..
7. Maverick spending
✓ Is the unauthorized or unplanned spending on goods or services.
✓ This can occur when employees purchase items outside the
company’s approved supplier network.
To measure Maverick spend, companies can track the following metrics:
• The amount of money spent on non-approved suppliers
• The number of purchase orders placed with non-approved suppliers
• The percentage of total procurement spend that is maverick spend
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Procurement KPI’s/Matrix……..
Takeaways
And while this list is not exhaustive, it is still comprehensive enough to cover all of
the critical metrics and KPIs that need to be taken into consideration.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PORTFOLIO ANLAYSIS
I. KRALJIC PORTFOLIO ANAYIZIS
Matrix Kraljic’s matrix is a simple spend segmentation tool that identifies four broad classes of
organizational input. Kraljic essentially places the criticality of an item to the organization on one axis of a
four-box matrix, and the difficulty of operating in that item’s supply market on the other. The matrix is
also referred to as “portfolio matrix” or “positioning matrix”.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PORTFOLIO ANLAYSIS
I. Kraljic Portfolio Analyzes.. Image explortion
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PORTFOLIO ANLAYSIS
A. STRATEGIC ITEMS
High supplier risk and high profit impact items cover strategic suppliers. Ensuring an effective and predictable
supplier relationship is key to the future of the buying company as there are only a handful of suppliers. Managing
such suppliers requires a diverse array of skills and can subsume a significant proportion of executive time in
sponsoring and directing the relationship. Unlike the non-critical items, each contract is unique and focuses upon the
shared gains that equal partners enjoy in a collaborative relationship.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PORTFOLIO ANLAYSIS
B. BOTTLENECK ITEMS
The risk is high, but profitability is low. Here, the strength is in the hands of the supplier. The market consists of few
suppliers that can behave oligopolistically to force prices upward. Procurement Leaders found that these suppliers
absorb more of buyers’ time compared to any other segment. The supplier relationship is demanding, even though they
have a limited impact upon company profitability. The market structure forces buyers to accept an unfavorable deal.
The main strategy rests upon damage limitation. Few opportunities will arise from this category and more creative
buyers will seek to alter the terms of trade. Innovative internal activities can redevelop product requirements such that
the material can be replaced with another and preferably sourced from a leverage supplier
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PORTFOLIO ANLAYSIS
C. LEVERAGE ITEMS:
Where items have a high profitability, but a low risk factor, buyers possess the balance of power in the
relationship and leverage this strength to obtain greater returns. Traditionally, procurement professionals
have exploited this status to lower prices, but increasingly more advanced companies are looking to
unlock the innovative potential of their suppliers. The market dynamics of this relationship rest upon an
abundance of highly commodified parts. Suppliers can be easily substituted as their offerings are much
the same. The only limitation for buyers is perhaps over-playing their hand and forcing a low-profit
margin vendor into insolvency.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
PORTFOLIO ANLAYSIS
D. ROUTINE/NON-CRITICAL ITEMS:
These items are low risk and have a low impact upon organizational profitability. The most commonly
used example in this segment is office stationery. Although important for employees to perform their
duties, pens and paper do not have a significant impact upon the business, nor does their absence
represent a serious threat. For buyers, stationery is a nuisance as it clogs up time with peripheral
concerns. As such, the sourcing strategies deployed here focus on efficiency and reducing
administrative burden. Techniques such as e-auctioning and catalogues are an excellent means to
redirect responsibilities either directly to suppliers or to internal customers that are requisitioning the
goods.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
ANALYSING SUPPLIER PERCEPTIONS
The supplier preferencing model is an analytical tool that can be used to analyse and understand the supplier’s
perspective, which is analyzed as depending on two factors: the inherent attractiveness of the customer and the value
of the customer’s business. This tool helps organizations analyze why suppliers view organizations as they do and to
assess strategies to change that preferencing. As buyer to see how your supplier view your company.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
SUPPLIER PERCEPTION: The supplier perception is the view of the supplier back the purchaser, you.
This is how the supplier feels about this relationship. It has different names. This matrix is often better
known as the supplier perception model or the supplier preference model.
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
 THERE ARE FOUR SUPPLIER PREFERENCE QUADRANTS:
1. CORE QUADRANT
2. DEVELOP QUADRANT
3. NUISANCE QUADRANT
4. EXPLOITABLE QUADRANT
1.CORE QUADRANT
These are the huge companies with substantial buying power and strong core business – think companies like
Target, Lowes and the like. Suppliers consider core purchasers as key to continued success, and these
purchasers get lots of attention and time. The outcomes are strategic partnerships, long-term cooperation and
close strategic partnerships on both sides.
2.DEVELOP QUADRANT
Purchasers here have low purchase value but high attraction through long-term development possibilities or
other factors outside of payment capabilities. This means a supplier will give this particular buyer time and effort
to build a positive relationship because of the high potential of the buyer. Those purchasers who fall into this
quadrant may earn preferential treatment options (pricing, services, correspondence etc.)
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
 supplier preference quadrants………..
3. NUISANCE QUADRANT
The buyer has both low value and attraction. The purchaser lacks sufficient capital to meet MOQ and little to no
development. Suppliers faced with these buyers take little interest in establishing any sort of relationship now or in the
future. There is no practical reason to invest any resources and energy beyond what is necessary. The buyer may not
pay high prices but will also not receive any add value in personalized services. If this is the case, it is absolutely
necessary for the buyer to reconsider their position and work to improve – quickly.
4.EXPLOITABLE QUADRANT
There may be excellent purchases but only for a few sales or a one-time deal. It is common for the supplier to quote
exceptional prices specifically to exploit the purchaser. The reasoning of the supplier is sound. “Why would I invest
my time, effort and resources into a one shot deal? I am going to make what I can out of this and return to my usual
customer base.” It is vital the purchaser choose wisely for risk management and being overly exploited.
It is very easy to be exploited when you are in a hurry to order products. There are certain methods for supplier
pricing, and it is a good idea to understand them if you need products quickly
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
By Guta Mengesha,Ethiopia
supplier preference quadrants image
Evolution and Growth of Supply chain
 SPEND ANALYZE
o Is the process of collecting, cleansing, classifying and analyzing expenditure data with the
purpose of decreasing procurement costs, improving efficiency, and monitoring compliance.
It can also be leveraged in other areas of business such as inventory management, budgeting
and planning, and product development..
 There are three core areas of spend analysis – visibility, analysis and process. By leveraging
all three, companies can generate answers to the crucial questions affecting their spending,
including:
1. What am I really spending?
2. With whom am I spending it?
3. Am I getting what’s been promised for that spend?
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
 SPEND ANALYZE
Benefit of spend analysis
➢ Identify savings opportunities
➢ Full visibility of expense
➢ Improving negotiation strategies
➢ Data driven sourcing
➢ Manage risks.
➢ Improving supplier performance
➢ Streamline operation
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
 SPEND ANALYZE
spend analysis can help you review past performance and make an assessment of future performance
and trends.
 Here are the basic questions we ask when analyzing expenses:
• What do we buy?
• How much did we pay?
• How much did we buy?
• Who do we buy from?
• Who is the buyer?
• Under what conditions did we buy?
• How often do we buy?
• When did we buy it?
• Are the products or services consistent with our order?
• Where were the items delivered (geographic location)?
• How does the data compare to previous years?
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
REFERENCE
o A.T. Kearney's Seven Steps for Strategic Sourcing. (n.d.). Retrieved from Association of International Procurement Technology:
https://www.aipts.org/a-t-kearneys-seven-steps-for-strategic sourcing/
o Institute, C. F. (n.d.). What is Industry Analysis. Retrieved from Corporate Finance Institution:
https://corporatefinanceinstitute.com/resources/knowledge/strategy/industry-analysis methods/
o Massin, J.-P. (n.d.). The Strategic Sourcing Matrix quandrants' characteristics. Retrieved from Sourcing and Procurement:
http://sourcing-and-procurement.com/the-strategic-sourcing-matrix quadrants-characteristics/
o Network, T. T. (2020, April). Retrieved from Tech Target Network: https://searcherp.techtarget.com/definition/strategic-sourcing
o Philippe-Massin, J. (n.d.). Sourcing and Procurement . Retrieved from Example of a Sourcoing Tree: http://sourcing-and-
procurement.com/example-of-a-sourcing-tree/
o Strategic Sourcing and Supply Management. (n.d.). Retrieved from AT Kearney : http://www.middle
east.atkearney.com/consumer-products-retail/retail-capability/ /asset publisher/Jn6LoViFv6ZJ/content/strategic-sourcing-and-
supply management/10192?inheritRedirect=false redirect=http3A2F%2Fwww.middle east.atkearney.com%2Fconsumer-prod
o Supply, T. C. (2016). Category Management in Procurement and Supply. Profex Publishing Lim
By Guta Mengesha,Ethiopia
Evolution and Growth of Supply chain
Thank YOU
God is Good all the time!
By Guta Mengesha,Ethiopia

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Evolution and Growth of Supply chain.pdf

  • 1. Evolution and Growth of Supply chain By Guta Mengesha,Ethiopia
  • 2. Evolution and Growth of Supply chain By Guta Mengesha(MBA, MA) Ethiopia Email: gutamengeshadinagde@gmail.com By Guta Mengesha,Ethiopia
  • 3. Evolution and Growth of Supply chain Slide outline  Definition of Procurement  Procurement process  Different functional names of procurement  Total cost of ownership (TCO)  Impact of procurement on cost and revenue  Procurement as a profession . Supplier relationship management .Strategic sourcing .Category Management . Contract Management . Negotiation  Key procurement trends  Spend Alaysia  Supply segmentation form buyer and seller prospect  KPIs in procurement By Guta Mengesha,Ethiopia
  • 4. Evolution and Growth of Supply chain Procurement: It is act or action involved in obtaining of good and/or service for the lowest Total cost of ownership (TCO). Source: Chartered institute of procurement and supply Procurement” means acquisition by way of purchase, lease, license or otherwise, either using public funds or any other source of funds (e.g. grant, loans, gifts, private investment etc.) of goods, works or services or any combination thereof. Source NTEP guidance and training material. By Guta Mengesha,Ethiopia
  • 5. Evolution and Growth of Supply chain Procurement Process • Need Assessment • Market analysis: collection and analysis of supply market data from manufacturing process, published data, trade fairs, supplier annual report, Gov and industry statics for the aim of insight to investment to be made, Risk involved and capability of potential suppliers • Supplier selection: Tool :Gozzian curve • Portfolio Analysis: classify items Tool: Kralijic Matrix • Risk management: up to this is called sourcing activities before signing a contract. • Order fulfilling • Receive and payment • Supplier Performance: Supplier relationship analysis( how they perceive buyer) and Supplier development( alternative when supplier incapable of meeting your needs like re-source, outsource, produce internally, improve supplier performance • Quality management • Cotinus improvement: activities after contract is called operational procurement By Guta Mengesha,Ethiopia
  • 6. Evolution and Growth of Supply chain PROCUREMENT PRINCIPLES • All procurement should be subject to competition. A competitive process provides the best opportunity for value for money • Value for money includes both whole life costing and quality. • Sustainability issues can be considered where appropriate and when relevant. This must be balanced against cost and affordability. Sustainability issues should be addressed in the planning stages. In some instances, particularly where environmental issues are relevant, sustainable procurement can reduce whole life costs and improve quality through recycling or reducing disposal costs • All procurement should be fair, open and transparent. All contracting authorities should be seen to be acting in a fair manner. A well-managed purchase, with a well-defined requirement from the onset, will help enable a successful result • Requirements definition and procurement strategy: Your strategy should set out the key objectives and justification for the purchase. You should also have a clear sourcing strategy and have considered the options for leveraging existing contracts and collaboration opportunities. • Market Assessment/Market creation :There may potentially be limited response to a requirement because of its nature or the state of the market. In these cases, the organization should stimulate the market. • Producing the requirement: Requirements need to be clear and unambiguous. An inadequately thought through requirement is a common reason for procurement not providing the right goods or services, or. Requirements should be defined in as much detail as possible, though there may be cases where you can only develop a full requirement during the procurement process. From the onset, broad parameters should be set that establish what the organization can or will tolerate from its purchase. By Guta Mengesha,Ethiopia
  • 7. Evolution and Growth of Supply chain PROCUREMENT PRINCIPLES • Supplier selection: Start the supplier selection and evaluation process early. This can begin with pre-qualification. Clearly define, plan and document your approach from the start, ensuring a fair and transparent process can be demonstrated. Supplier selection and evaluation should be a continuous process, each passing through a number of stage gates • Proposal evaluation Evaluation is a stage gate hurdle; it passes every supplier that, at the particular stage, meets all the criteria required of them. It picks no favorites and does not prejudge the outcome of the overall process. Follow your pre-defined evaluation model and criteria. For additional information on developing evaluation criteria • Contract preparation Match the contracting process with the nature of the purchase. Take into account complexity, size, and value. By Guta Mengesha,Ethiopia
  • 8. Evolution and Growth of Supply chain PROCUREMNNT PRINCIPLES…… • Bid evaluation Evaluate the financial and qualitative elements separately, then review the results together to reach the trade-off (if one has to be made) that represents best value for money. For additional information on bid evaluation • Award Unsuccessful suppliers may require more attention than successful ones. You need to retain their interest and goodwill for the future, convey lessons that will enable them to submit stronger bids, build relationships and networks and maintain transparency. Your chosen supplier may fail and at this moment there is no more qualified alternative than the supplier that came second in the selection process. • Procurement project closure Close each purchase in a controlled way. Capture the lessons you have learnt. Analysis should capture how well the organization and process have performed against aims and projections, especially planned costs, schedule, tolerances and business case. • Implementation and transition There should be a clear transition process from the procurement stage to contract management — it is important to ensure the organization understands and fulfils its obligations so as not to delay or derail implementation. By Guta Mengesha,Ethiopia
  • 9. Evolution and Growth of procurement By Guta Mengesha,Ethiopia
  • 10. Evolution and Growth of Supply chain Growth of procurement By Guta Mengesha,Ethiopia
  • 11. Evolution and Growth of Supply chain Different functional names of procurement Strategic Sourcing Supply Chain Department Supplier Relationship management Negotiation Category Management Contract Management Value management By Guta Mengesha,Ethiopia,kk
  • 12. Evolution and Growth of Supply chain SUPPLIER RELATIONSHIP MANAGEMENT WHAT IS SUPPLIER MANAGEMENT? It is important that the company engages properly with its suppliers, establishes a proper relationship, manages the requirements, and communicates effectively about them to the vendors. A comprehensive supplier management policy is essential. This process of supplier management recognizes the value of the contractor’s contribution. It then builds and manages a relationship with the contractor to sustain that contribution and improve suppliers performance and supplier relationships. Supplier Management Dashboard and Reports by Simfoni Analytics evaluates if the suppliers are performing as per the organizational requirements and help identify areas of improvement while engaging with suppliers throughout their lifecycle. The report enables companies to evaluate and select suppliers, negotiate future contracts, and evaluate supplier performance. The Supplier Management Dashboard provides a detailed report on each supplier by spend category, spend trends, spend transactions by Business units, and payment terms. The advance filters can help deep dive by PO, Non-PO, contracted or non-contracted, supplier diversity, and so on. By Guta Mengesha,Ethiopia
  • 13. Evolution and Growth of Supply chain What is Supplier Relationship Management (SRM) actually mean…………. Supplier Relationship Management (SRM) is the systematic approach of assessing suppliers’ contributions and influence on success, determining tactics to maximize suppliers’ performance, and developing the strategic approach for executing these decisions. As part of vendor mangement supplier relationship management is where companies segment their suppliers and determine important supply categories, in order to devise strategies capable of managing their suppliers and supplies more effectively. Supplier relationship management is comprised of three main steps as follows: 1.Supplier Segmentation : is differentiating suppliers as a means of identifying risks and opportunities. 2. Supplier strategy development: Devising an optimal way to interact with suppliers based on business goals and needs. 3. Supplier strategy execution: Executing the designed strategy, at the previous step, in an effective way to obtain desired results in line with the company's goals. By Guta Mengesha,Ethiopia
  • 14. Evolution and Growth of Supply chain What is Supplier Relationship Management (SRM) actually mean Takeaway Supplier relationship management is important because a long-term relationship between your organization and its suppliers allows for the free flow of feedback and ideas. Over time, this will create a more streamlined, effective supply chain that will have a positive impact on costs and customer service. By Guta Mengesha, Ethiopia
  • 15. Evolution and Growth of Supply chain The supplier management process is used to centrally review and manage the relationship with each contractor which is owned by an individual. • It provides value for money to all the parties involved and benefits the entire supply chain • It ensures that the targets in all the contractor agreements and contracts are resource aligned with the needs of the business and within the service level agreements. • It ensures the seamless delivery of quality services which are aligned to the expectation of the business. By Guta Mengesha,Ethiopia
  • 16. Evolution and Growth of Supply chain The Purpose of Supplier Management? The main purpose of supplier management is to get adequate returns for the money spent on the vendors and provide seamless quality of service to the business. The main objectives for this are: • To ensure that maximum value for money spent is obtained from all the vendors and contracts. • To make sure that the underpinning contracts (UCs) and agreements with the suppliers are in line with the business needs and agreed on targets of the organization. • To manage the supply chain and relationships with the various vendors and monitor their performance by keeping accurate records. • To negotiate with the suppliers, finalize contracts, and manage them throughout their lifecycle. • To establish and maintain a policy regarding suppliers and also to maintain a supporting Supplier Contract Management Information System. By Guta Mengesha,Ethiopia
  • 17. Evolution and Growth of Supply chain Supplier Management Is key element in procurement and it involves: A. Registration or Pre-qualification of suppliers B. Supplier Relationship management C. Performance management . By Guta Mengesha,Ethiopia
  • 18. Evolution and Growth of Supply chain STRATEGIC SOURCING VS CATEGORY MANAGEMENT Strategic Management in procurement ➢ It is the a procurement process aimed at selecting the right suppliers and negotiating the best price to meet business objectives. ➢ It is component of supply chain management focused on spend optimization. ➢ Its primary goal is cost reduction ➢ Help deeper supplier audit that determine which supplier best the company’s needs and allow to stay aware of latest supplier developments and new supplier coming to market. ➢ Strengthen supplier relationship as more attention is placed on strategic selection ➢ It allow for regular contract analysis ➢ The RFP process is revised to ensure contract in place have competitive and lowest price ➢ With out it a contract the automatically renew have an ”Out-of-sight, out-of-mind effect” that leads to missing of opportunities for innovation. By Guta Mengesha,Ethiopia
  • 19. Evolution and Growth of Supply chain STRATEGIC SOURCING VS CATEGORY MANAGEMENT Benefit of strategic sourcing cont… ➢ Maximizing value for the organization ➢ Overall procurement cost reduction ➢ Improvement of the quality of products or services ➢ Optimization of an organization’s inventory ➢ Convenience and improvement of lead time Customized steps to implement strategic sourcing 1. Evaluating sourcing needs 2. Analyzing current spend 3. Performing market research to identify potential suppliers 4. RFP process and supplier selection 5. Contract negotiation 6. Evaluation and optimization By Guta Mengesha,Ethiopia
  • 20. Evolution and Growth of Supply chain Strategic procurement should be implemented in three broad steps: • Value chain positioning (VCP) – the process by which the organisation positions itself in the market to reflect a margin cost analysis of all the supply and value relationships within their market. • Market positioning analysis – this is where the organisation comes to understand the value creation and costs aspects of its own supply chains and how this compares to competitors. • Extended relational competence approach – This is where the organisation creates supplier and customer relationships that are underpinned with a solid idea of how value is created, what contracts should look like, how to install efficient boundaries and how best to exploit core competencies. By Guta Mengesha,Ethiopia
  • 21. Evolution and Growth of Supply chain Elements of strategic sourcing I. Supplier Management II. Demand Management III. Total cost of ownership IV. Sustainability By Guta Mengesha,Ethiopia
  • 22. Evolution and Growth of Supply chain CATEGORY MANAGEMENT • The most popular topics in the Procurement world which is said to be ‘Category Management’. • Category Management is a strategic approach to procurement where businesses segment their spend into areas that contain similar or related products enabling focus opportunities for consolidation and efficiency. • ‘’Category Management is the strategy of cost management and strategic supplier relationship management within an organization.’’ by Shanon • It is a strategic approach to procurement where businesses segment their spend into areas that contain similar or related products enabling focus opportunities for consolidation and efficiency. CPIS • Is used for efficient spend management and cost savings. • It involves the categorization of various goods and services and managing them as business units (BU) with the purpose of effectively and efficiently improving business outcomes. • It employs a structured and measurable project management approach to achieve these improved outcomes. • a general rule of thumb applies that products or services with similar characteristics are placed in one group. A few of these categories include: Information technology, Security, Medical, Office management, Industrial products/services • Once the categories have been identified, the organization can create a tailored strategy to meet their objectives. An analysis of current spend, pricing, and supplier performance will determine the best way to optimize the category. By Guta Mengesha, Ethiopia
  • 23. Evolution and Growth of Supply chain Benefit of category Management o Centralizing Spend Data: Category management enables easy tracking, logging, and reporting due to consolidated and centralized spend. It also allows for the outsourcing of spend analysis. o Cost Savings: By leveraging the expertise of strategic managers, knowledge of categories and subcategories not only adds value but also minimizes cost. o Better Vendor Risk Management: Since category management allows the organization to gain comprehensive knowledge of their suppliers, they can use one supplier’s operational risk to benchmark others, thereby maintaining a better risk management strategy. o Purchase to Pay Process: By perfecting its operational processes with one supplier, the organization can duplicate these processes for others in the same category without creating entirely new ones. o Streamlined Business Strategy: It also plays a key function in the strategic management of businesses. It can aid the expansion of a particular business operation if the need arises. By Guta Mengesha,Ethiopia
  • 24. Evolution and Growth of Supply chain Category Management………. Advantages of category management • Allows procurement professionals to focus on their time to conduct market analysis to fully leverage their negotiations • Helps to correctly manage suppliers to align with corporate objectives • Enhanced supplier relationships • Gain an in depth understanding of how each category contributes to risk management through market analysis • Enhances the customer experience as organization's will be able to focus on one category and look at promotions and product availability. By Guta Mengesha,Ethiopia
  • 25. Evolution and Growth of Supply chain Category Management……… Disadvantages of category management It relies on the good communication and collaboration with suppliers, which can sometimes be difficult.. The seven steps within category management include: By Guta Mengesha,Ethiopia
  • 26. Evolution and Growth of Supply chain Category Management process The process is highly fluid and often simplified to expedite results, but generally follow this framework: ✓ Analyze current spend to identify categories ✓ Define goals, KPIs, and objectives for each category ✓ Develop a master strategy to achieve each category’s goals ✓ Break the strategy down into specific tactics and phases ✓ Launch and implement strategy ✓ Evaluate and optimize. By Guta Mengesha, Ethiopia
  • 27. Evolution and Growth of Supply chain Enablers of Category Management By Guta Mengesha, Ethiopia
  • 28. Evolution and Growth of Supply chain Difference between strategic sourcing and Category managenent Variables Strategic sourcing Category Management Nature Process Strategy Focus Spending less within supply channels Value and goal based objective like buying lesser or smarter End result Leads to an overall spend optimization Leads to an overall supplier optimization Competency Functional Strategic Horizon Short Term/one time event Long term/end-to-end process Approach Event/process based Context Program No supplier development, no typical demand management Supplier development, demand management Commodity Single category Portfolio category Executive support Passive Proactive By Guta Mengesha, Ethiopia
  • 29. Evolution and Growth of Supply chain NEGOTIATION In a Florida State University study titled A Skills-Based Analysis of the World-Class Purchaser, Larry C. Giunpiero, Ph.D., found that negotiation skills were crucial in achieving an organization’s goals of improved quality, price delivery, and service. Negotiation: It is a conversation to reach an agreement. Procurement negotiation is a process by which professionals engage with each other to create agreeable terms for a contract. Negotiation is ‘coming to an agreement’. It is necessary as ‘the process by which agreements are reached, by parties with different and potentially divergent interests, is a complex one” (Chartered Institute of Purchasing & Supply, 2012) 2 . “In a procurement context, negotiation is a process of arriving at an agreement on the conditions of a contract, through discussions between buyer and seller: By Guta Mengesha,Ethiopia
  • 30. Evolution and Growth of Supply chain NEGOTIATION…….. Negotiation is a fact of life’. Everyone negotiates something every day. “In particular those involved with the procurement function. skills in negotiation are highly valued in the pursuit of commercial ‘value for money’ outcomes. (Chartered Institute of Purchasing & Supply, 2018) Both parties typically discuss pricing, payment, delivery date, and timeline. Ideally, the negotiations should consider the best options for both parties to build strong relationships that lead to long-term business. Ultimately, this creates a win-win result for both parties. In reality, procurement negotiations don’t always work out so easily or successfully. Those who enter into the negotiation often might not think about what’s best for everybody. Instead, they may be thinking about what’s best for themselves. With that in mind, it’s important to learn all you can about who you’re negotiating with and their true objectives. A good way to do that is to understand the different styles of negotiation that people use. That way, you're ready for whatever comes your way. By Guta Mengesha,Ethiopia
  • 31. Evolution and Growth of Supply chain NEGOTIATION………. FIVE STYLES OF NEGOTIATION 1.COMPETITION: Negotiators who use a competition style value the negotiation outcome more than the relationship between the two parties. Negotiators who use this style are looking to win the negotiation and want the other party to lose. Usually, negotiators who favor this style will do anything to get the win. 2.COLLABORATION: Collaborators value outcome and relationship equally because they believe both are important. They want a win-win outcome and a long-term relationship. And they'll work hard to achieve both. 3.COMPROMISE: While compromisers value outcome and relationship, they are willing to sacrifice a little of each to reach an agreement. They believe in winning some of what they want while losing a little bit of it. 4.ACCOMMODATION: Accommodators value the relationship more than the outcome and are willing to lose the negotiation. The result is a “you win, and I lose” style. This is the opposite of the competitive style. 5.AVOIDANCE: With this style, the negotiator doesn't value the outcome or the relationship. It can simply be considered a “lose-lose” model with the party withdrawing from the negotiation By Guta Mengesha,Ethiopia
  • 32. Evolution and Growth of Supply chain NEGOTIATION…………. 5 Styles of Negotiation By Guta Mengesha,Ethiopia
  • 33. Evolution and Growth of Supply chain NEGOTIATION…………. 5 Styles of Negotiation By Guta Mengesha,Ethiopia
  • 34. Evolution and Growth of Supply chain NEGOTIATION….. Seven Stages of Procurement Negotiation 1.Preparation: Thorough preparation is extremely important. This is when you acknowledge your negotiation style first. Then, you decide on the relationship and outcome you expect to achieve with the other party. You should also research the other party and, if possible, learn what negotiation style they typically use. 2.Opening: During the opening, the parties state the goals of the negotiation. This is when you can discover if the relationship and outcome expectations match. 3.Testing: As the name implies, both parties are “testing” each other to understand each party's values. Good communication and listening skills are key to this step. Paying attention during this stage can help you find opportunities. 4.Proposing: Both parties propose what they expect to achieve at this stage. It’s also a time when you and your team may want to think about modifications to your strategy based on the proposal from the other party. By Guta Mengesha,Ethiopia
  • 35. Evolution and Growth of Supply chain NEGOTIATION….. Seven Stages of Procurement Negotiation…… 5. Bargaining**: Based on what has been said, both parties should offer compromises if needed. Ideally, any compromises should be equal and agreeable to both parties. For example, look for opportunities to cut procurement costs on both sides. This way, everyone's paying the optimal price for the good or service. 6.Agreement: Once compromises are reached, the parties can make an agreement. When both parties accept the agreement and sign, the procurement contract becomes a legally binding document. 7.Closure: Both parties receive documentation and contracts from the previous stages for their records. After this stage, the negotiation is complete. By Guta Mengesha,Ethiopia
  • 36. Evolution and Growth of Supply chain NEGOTIATION Reasons for negotiation ➢ It ensure potential supplier understand requirements ➢ It avoid the possibility of litigation ➢ It exert the control over the manner in which the contract is performing ➢ It reduce risks ➢ It improve benefits like better quality, performance delivery ➢ It helps to overcome problems and challenges that might arise during course of contract ➢ It help to achieve value for money ➢ Foster sound continuing relationship ➢ Eliminate unnecessary cost ➢ Create better understanding and relationship with suppliers ➢ Gain knowledge of supplier products, capabilities,capacities and process. By Guta Mengesha,Ethiopia
  • 37. Evolution and Growth of Supply chain Contract Management Contract management is the means of managing contract creation, execution, and analysis to maximize operational and financial performance at an organization, all while reducing financial risk. By Guta Mengesha,Ethiopia
  • 38. Evolution and Growth of Supply chain Contract Management Allocate expert and dedicated contract management for the term of the contract. You need to have robust procedures, with people to manage the contract. The management provisions should be built into the contract. The level of contract management you need will depends on the type of contract. Inadequate planning for, and carrying out of, contract management is a crucial reason for user dissatisfaction and not realizing value for money. It is important to have continuity in the relationship and for the contract managers from both the procuring organization and the supplier to have been appointed early in the process. Match the contracting process with the nature of the purchase. Take into account complexity, size, and value. You should be able to answer 'yes' to the following questions. • Does the contract accurately represent the requirement? • Have stakeholder requirements and views been taken into account? • Do potential providers have realistic solutions to meeting the requirement? • Does the organization have the necessary skills and resources to meet its obligations under the contract and for managing the contract? • Have you had appropriate, expert legal advice? • Has the future contract manager been involved in the process? By Guta Mengesha,Ethiopia
  • 39. Evolution and Growth of Supply chain TOTAL COST OF OWNERSHIP(TCO) To fully understand what you are paying for equipment, you need to evaluate the Total Cost of Ownership (TCO), which is an estimation of all the collective expenses associated with purchasing and operating a piece of equipment. The TCO will provide a way to compare pieces of equipment “apples to apples.” The price tag can cause much confusion because it reflects one small part of the big picture. Some sources say that the amount on the price tag represents less than 10 percent of the total cost spent on a piece of equipment over its lifetime. In fact, energy costs, maintenance, and repair fees are predicted to have at least five times more relevance than the upfront cost. But, few consider these factors as part of the price during their selection process. TOC Formula By Guta Mengesha,Ethiopia
  • 40. Evolution and Growth of Supply chain Total cost of ownership(TCO)…… I = Initial cost: The initial cost is the number that appears on the price tag. O = Operation: Operation is the cost to install the asset, test the asset, train employees to run the asset, and the cost of energy to operate the asset. M = Maintenance: Maintenance includes the cost of regular repairs such as cleaning, inspecting, lubricating, and adjusting the asset to make sure it is in optimal condition. This also includes reactive maintenance when the equipment breaks down unexpectedly. D = Downtime: While you could include downtime along with the cost of maintenance, it is often so large that it warrants its own category. Downtime involves the labor costs of employees whose work is delayed, indirect labor costs from supervisors who address the issue, lost production, and lost customers from inability to meet time expectations. P = Production: Two different assets will likely have different levels of output, produce different qualities, and have different environmental implications. R = Remaining value: The remaining value has to do with the asset’s longevity. How much will the asset be worth in 5 or 10 years? It can be a big difference. By Guta Mengesha,Ethiopia
  • 41. Evolution and Growth of Supply chain Total cost of ownership(TCO) This formula can sound a little overwhelming, but let’s start simple. I + M – R = TCO For this example, we will start with three variables to compare two hypothetical of assets: Asset A and Asset B. The variables chosen are initial cost (I), maintenance costs over 5 years (M), and the remaining value after 5 years of depreciation (R). • Asset A has an initial cost (I) of $10,000. • Asset B has an initial cost (I) of $20,000, twice the upfront cost as Asset A. By Guta Mengesha,Ethiopia Asset A Asset B Initial cost $10,000 $20,000 + Maintenance $5,000 $2,000 - Remaining value $2,000 $10,000 = TCO $13,000 $12,000
  • 42. Evolution and Growth of Supply chain Total cost of ownership(TCO) Based on initial cost (I) alone, Asset A would be the clear choice. However, the TCO can tell us a lot more about which option is best. The TCO of Asset B is less than Asset A even though its initial cost was twice as much. We will go with a conservative estimate and of $50,000 per hour, even though downtime will likely be a lot more. Since $163,000 – $62,000 = $101,000, Asset B costs $101,000 less than Asset A. The price gap becomes wider with every variable that you add, giving you a clear choice for cost value. By Guta Mengesha,Ethiopia
  • 43. Evolution and Growth of Supply chain Procurement KPI’s/Matrix KPIs (key performance indicators), also called metrics, are designed to measure the performance and effectiveness of procurement management. Procurement may affect product quality, costing, timely delivery, and customer satisfaction. So it is important for organizations to monitor and improve, performance and health of procurement. Procurement KPI metrics help organizations to track and report performance and effectiveness of procurement in meeting business objectives. Are broadly classified in to four KPI 1.Quality KPI: measure quality of good, work, service you procure 2.Inventory KPI: measure the efficiency of your inventory management 3.Delivery KPI: measure the timeliness and reliability of deliveries 4,Cost saving KPI- the money saved By Guta Mengesha,Ethiopia
  • 44. Evolution and Growth of Supply chain Procurement KPI’s/Matrix -image By Guta Mengesha,Ethiopia
  • 45. Evolution and Growth of Supply chain Procurement KPI’s/Matrix Is a measurable value that tracks all relevant aspect of obtaining or purchasing goods and services. It helps procurement department to control and optimize the quantity, quality , cost timing and sourcing of purchasing process. (By Rakotomola) 1. QUALITY KPI’S A. COMPLIANCE RATE (C.R) : ❑ Is a measure of how well supplier adhere to term of their contract with buyers. ❑ To ensure legal security, businesses need to be in contractual and policy compliance. ❑ To improve the compliance rate, businesses can turn to a foolproof purchasing contract that clearly outlines all penalties in the event of a breach. ❑ Are the ratio of disputed invoices to total invoices, as well as the total difference between the paid and quoted prices. ❑ A high compliance rate means fewer disputes, delays and extra expending ❑ A low compliance rate means more problems and inefficiencies C.R= Number of supplier’s meeting the requirement X 100 Total number of supplier By Guta Mengesha,Ethiopia
  • 46. Evolution and Growth of Supply chain Procurement KPI’s/Matrix……. B. PURCHASE ORDER ACCURACY (P.O.A) ❑ It measures how well supplier meet the buyer’s expectation ❑ It allows if the orders are correct and timely ❑ It is determined by comparing the actual deliveries with agreed terms ❑ Higher P.O.A benefits the buyer with lower cost and improved efficiency. ❑ A low purchase order accuracy will typically increase the company's operating costs. ❑ This specific metric will help organizations keep an eye on whether their suppliers are delivering the right orders and if these deliveries are on time. By Guta Mengesha,Ethiopia
  • 47. Evolution and Growth of Supply chain Procurement KPI’s/Matrix…………… C. SUPPLIER DEFECT RATE (S.D.R) ❑ It measures the proportion of faulty or substandard products from a supplier ❑ It helps to identify the type of defects and their root courses ❑ By measuring the supplier defect rate based on defect types, procurement professionals will be able to generate actionable insights regarding each supplier's overall trustworthiness. ❑ The supplier defect rate is a representation of the total number of substandard products over the total units tested. ❑ It typically expressed as defects per million ❑ S.D.R = Total number of substandard products x 100 Total number of unit recieved By Guta Mengesha,Ethiopia
  • 48. Evolution and Growth of Supply chain Procurement KPI’s/Matrix………… 2.INVENTORY KPI’S A. INVENTORY TURNOVER RATIO (I.T.R) ❖ It shows how efficiency a company sells and replace its inventory in a given place. ❖ Higher ration indicates improved inventory planning or inventory sold more quickly and efficiently. I.T.R= Cost of good sold Average inventory level By Guta Mengesha,Ethiopia
  • 49. Evolution and Growth of Supply chain Procurement KPI’s/Matrix………. B. INVENTORY AGING ❖ It indicate Report tells us how many days an item is in inventory ❖ Report represents a list of all the items on hand that are grouped based on the period of time spent in inventory. ❖ It helps to spot slow moving inventory and associated storage cost ❖ High inventory aging means capital tied-up in stock ❖ A higher inventory aging reflects the blockage of certain working capital in the form of inventory. Average age of inventory= Average cost of inventory at its present level X 365 Cost of good sold C. INVENTORY CARRYING COST (I.C.C) ❖ It refers to the expense of holding inventory over a certain period of time ❖ This includes the cost of space such as rent, electricity, equipment, salaries, inventory shrinkage or losses, etc ❖ The more products in stock, higher the inventory carrying cost. It is overhead cost ❖ I.C.C = Inventory holding cost X 100 The total value of the inventory By Guta Mengesha,Ethiopia
  • 50. Evolution and Growth of Supply chain Procurement KPI’s/Matrix 3.Delivery K.P.I’s A. SUPPLIER LEAD TIME (S.L.T) ➢ It measures the time between order placement and shipment by supplier ➢ This matrix refers to the efficiency of the purchasing process ➢ Is typically measured in days and starts with the availability confirmation and order, and ends with the delivery. ➢ Shorter lead times are preferred, as long as quality remains uncompromised. ➢ For example, if you place a PO on January 1st and receive the goods or services on January 10th, your lead time would be 10 days. S.L.T= Delivery time – Purchase order acceptance time By Guta Mengesha,Ethiopia
  • 51. Evolution and Growth of Supply chain Procurement KPI’s/Matrix……….. B. PURCHASE ORDER CYCLE TIME ( P.O.C) ➢ It measures the time it takes to fulfil an order from requisition to delivery ➢ It is time between receipt of purchase requisition to releasing a purchase order to the vendors. ➢ It measured from the moment a purchase requisition is submitted to the time when it's sent to a vendor ➢ It also indicates supplier’s delivery speed and indicates the preparedness of the procurement team. ➢ It is the time it takes to create the PO , approve it, send it to the supplier, and receive the goods or services. ➢ It reflects how efficiently the procurement team is able to execute intermediate tasks such as sending RFQs, receiving and comparing quotes, approvals, etc. ➢ Shorter purchase order cycle time confirms an efficient procurement strategy. ➢ The supplier with shorter cycle time are ideal for urgent orders P.O.C= Po delivery date(time order received by customer)-order date(time order placed) Total number of orders shipped By Guta Mengesha,Ethiopia
  • 52. Evolution and Growth of Supply chain Procurement KPI’s/Matrix c. Vendor availability (V.A) ❖ It measures a supplier ability to meet urgent needs and indicate their reliability. ❖ It calculates the ratio of available items to total orders placed ❖ A supplier availability of 90% or higher indicate a strong and efficient supply chain performance V.A= Number of times items area available with vendor Total number of orders placed with the vendor D. Emergency purchase ratio (E.P.R) ❖ This quantifies the frequency of urgent orders placed by the company ❖ Is measured by comparing the emergency purchases to the total number of purchases made over a given period of time ❖ Are unplanned orders that are made so as to avoid any product shortages ❖ Lowe numbers signify improved planning and efficiency E.P.R=the number of emergency purchase Total number of purchase over fiscal period of time By Guta Mengesha,Ethiopia
  • 53. Evolution and Growth of Supply chain Procurement KPI’s/Matrix 4.COST SAVING K.P.I A. PROCUREMENT ROI • It measures the financial gain from the procurement activities relative to the investment • It calculates how efficiently procurement contribute to financial performance • Is a ratio between the annual cost savings and the annual procurement cost. P.ROI= Annual cost saving Annual procurement cost OR Procurement ROI = (Cost Reduction + Cost Avoidance)/Cost of Procurement Operation By Guta Mengesha,Ethiopia
  • 54. Evolution and Growth of Supply chain Procurement KPI’s/Matrix….. B. COST REEDUCATION • It measures a percentage of saving achieved through negotiation , finding alternative supplier, reduce maverick spending and discounts on purchases • Is a central procurement KPI • It is utilized to plan the company’s budget and spending as part of long-term cost management strategy. • It measures the tangible hard savings that were achieved over the years through cost management techniques. • You can measure this KPI by comparing the old costs with the new costs for the same good or service • It is determined by comparing the previous and current price for identical items. • It is also called hard savings. • Cost Reduction = Actual Purchasing Price – Last Price Paid or (Procurement costs in the previous period – procurement costs in the current period • For example, if your procurement costs in the previous period were $100 million and your procurement costs in the current period are $90 million, your procurement cost reduction would be $10 million By Guta Mengesha,Ethiopia
  • 55. Evolution and Growth of Supply chain Procurement KPI’s/Matrix…. C. COST AVOIDANCE OR SOFT SAVING ✓ Refers to how the procurement team prevent or mitigate potential future additional costs. ✓ These are savings from the actions taken to reduce future task ✓ Although not quantifiable , still contribute to cost saving as companies can track metrics such as the number of late deliveries, quality defects, and supplier failures to identify areas where cost avoidance occurs ✓ One effective way to avoided costs is to secure long term contracts that stabilize price and prevent fluctuations. ✓ Is the amount of money a company saves on its procurement costs by avoiding potential problems, such as late deliveries, quality issues, or supplier failures ✓ These do not appear directly in the company's bottom line in any tangible or quantifiable way; nevertheless, these can still have a positive impact, even if they don't directly impact the income statement. ✓ It often targets strategic spend such as new technologies or investments that have no terms for comparison ✓ Few examples are rate contracts or price protection, negotiation after initial quotes, asking for value-adds such as add-on services, continuous improvements for saving, finding substitutes By Guta Mengesha,Ethiopia
  • 56. Evolution and Growth of Supply chain Procurement KPI’s/Matrix……… D. SPEND UNDER MANAGEMENT (SUM) ✓ It optimize expenses by ensuring negotiated prices are consistently applied. ✓ It is the percentage of a company’s procurement spend managed through its approved supplier network. ✓ The SUM represents the difference between the total approved spend such as direct, indirect, and service-related costs, and the Maverick spend. ✓ It covers strategically managed spend and negotiated rates with suppliers ✓ Consolidated purchase and negotiating bulk discount can result in substantial saving. SUM=Total procurement spend – maverick spend X100 Total procurement spend Example if total procurement spend is $100 million and your maverick spend is $10 million SUM is 90% . By Guta Mengesha,Ethiopia
  • 57. Evolution and Growth of Supply chain Procurement KPI’s/Matrix……. E. PRICE COMPETITIVENESS ✓ Minimal vendor competition will oftentimes lead to a supplier monopoly. ✓ Is the ability of a company to obtain goods and services at competitive prices ✓ Over the long-term, this can lead to lower-quality services and fewer growth opportunities. ✓ The focus is placed on shortlisting vendors that offer a competitive advantage. ✓ This can be measured by comparing a company’s prices to those other companies pay for the same goods and services. By Guta Mengesha,Ethiopia
  • 58. Evolution and Growth of Supply chain Procurement KPI’s/Matrix Other Relevant KPI 5. EMPLOYEE LEARNING AND GROWTH KPI Number of employees with certification, training investment per employee 6. SUPPLIER RATINGS ➢ This KPI evaluates the performance of suppliers on various parameters. Few key parameters can be response rate, on-time delivery of material, quality of material, invoice accuracy. ➢ It helps in identifying strong and weak suppliers. ➢ Companies can use supplier ratings to identify, reward and retain well-performing suppliers and to identify, take corrective action regarding weak suppliers By Guta Mengesha,Ethiopia
  • 59. Evolution and Growth of Supply chain Procurement KPI’s/Matrix Other Relevant KPI…………….. 7. Maverick spending ✓ Is the unauthorized or unplanned spending on goods or services. ✓ This can occur when employees purchase items outside the company’s approved supplier network. To measure Maverick spend, companies can track the following metrics: • The amount of money spent on non-approved suppliers • The number of purchase orders placed with non-approved suppliers • The percentage of total procurement spend that is maverick spend By Guta Mengesha,Ethiopia
  • 60. Evolution and Growth of Supply chain Procurement KPI’s/Matrix…….. Takeaways And while this list is not exhaustive, it is still comprehensive enough to cover all of the critical metrics and KPIs that need to be taken into consideration. By Guta Mengesha,Ethiopia
  • 61. Evolution and Growth of Supply chain PORTFOLIO ANLAYSIS I. KRALJIC PORTFOLIO ANAYIZIS Matrix Kraljic’s matrix is a simple spend segmentation tool that identifies four broad classes of organizational input. Kraljic essentially places the criticality of an item to the organization on one axis of a four-box matrix, and the difficulty of operating in that item’s supply market on the other. The matrix is also referred to as “portfolio matrix” or “positioning matrix”. By Guta Mengesha,Ethiopia
  • 62. Evolution and Growth of Supply chain PORTFOLIO ANLAYSIS I. Kraljic Portfolio Analyzes.. Image explortion By Guta Mengesha,Ethiopia
  • 63. Evolution and Growth of Supply chain PORTFOLIO ANLAYSIS A. STRATEGIC ITEMS High supplier risk and high profit impact items cover strategic suppliers. Ensuring an effective and predictable supplier relationship is key to the future of the buying company as there are only a handful of suppliers. Managing such suppliers requires a diverse array of skills and can subsume a significant proportion of executive time in sponsoring and directing the relationship. Unlike the non-critical items, each contract is unique and focuses upon the shared gains that equal partners enjoy in a collaborative relationship. By Guta Mengesha,Ethiopia
  • 64. Evolution and Growth of Supply chain PORTFOLIO ANLAYSIS B. BOTTLENECK ITEMS The risk is high, but profitability is low. Here, the strength is in the hands of the supplier. The market consists of few suppliers that can behave oligopolistically to force prices upward. Procurement Leaders found that these suppliers absorb more of buyers’ time compared to any other segment. The supplier relationship is demanding, even though they have a limited impact upon company profitability. The market structure forces buyers to accept an unfavorable deal. The main strategy rests upon damage limitation. Few opportunities will arise from this category and more creative buyers will seek to alter the terms of trade. Innovative internal activities can redevelop product requirements such that the material can be replaced with another and preferably sourced from a leverage supplier By Guta Mengesha,Ethiopia
  • 65. Evolution and Growth of Supply chain PORTFOLIO ANLAYSIS C. LEVERAGE ITEMS: Where items have a high profitability, but a low risk factor, buyers possess the balance of power in the relationship and leverage this strength to obtain greater returns. Traditionally, procurement professionals have exploited this status to lower prices, but increasingly more advanced companies are looking to unlock the innovative potential of their suppliers. The market dynamics of this relationship rest upon an abundance of highly commodified parts. Suppliers can be easily substituted as their offerings are much the same. The only limitation for buyers is perhaps over-playing their hand and forcing a low-profit margin vendor into insolvency. By Guta Mengesha,Ethiopia
  • 66. Evolution and Growth of Supply chain PORTFOLIO ANLAYSIS D. ROUTINE/NON-CRITICAL ITEMS: These items are low risk and have a low impact upon organizational profitability. The most commonly used example in this segment is office stationery. Although important for employees to perform their duties, pens and paper do not have a significant impact upon the business, nor does their absence represent a serious threat. For buyers, stationery is a nuisance as it clogs up time with peripheral concerns. As such, the sourcing strategies deployed here focus on efficiency and reducing administrative burden. Techniques such as e-auctioning and catalogues are an excellent means to redirect responsibilities either directly to suppliers or to internal customers that are requisitioning the goods. By Guta Mengesha,Ethiopia
  • 67. Evolution and Growth of Supply chain ANALYSING SUPPLIER PERCEPTIONS The supplier preferencing model is an analytical tool that can be used to analyse and understand the supplier’s perspective, which is analyzed as depending on two factors: the inherent attractiveness of the customer and the value of the customer’s business. This tool helps organizations analyze why suppliers view organizations as they do and to assess strategies to change that preferencing. As buyer to see how your supplier view your company. By Guta Mengesha,Ethiopia
  • 68. Evolution and Growth of Supply chain SUPPLIER PERCEPTION: The supplier perception is the view of the supplier back the purchaser, you. This is how the supplier feels about this relationship. It has different names. This matrix is often better known as the supplier perception model or the supplier preference model. By Guta Mengesha,Ethiopia
  • 69. Evolution and Growth of Supply chain  THERE ARE FOUR SUPPLIER PREFERENCE QUADRANTS: 1. CORE QUADRANT 2. DEVELOP QUADRANT 3. NUISANCE QUADRANT 4. EXPLOITABLE QUADRANT 1.CORE QUADRANT These are the huge companies with substantial buying power and strong core business – think companies like Target, Lowes and the like. Suppliers consider core purchasers as key to continued success, and these purchasers get lots of attention and time. The outcomes are strategic partnerships, long-term cooperation and close strategic partnerships on both sides. 2.DEVELOP QUADRANT Purchasers here have low purchase value but high attraction through long-term development possibilities or other factors outside of payment capabilities. This means a supplier will give this particular buyer time and effort to build a positive relationship because of the high potential of the buyer. Those purchasers who fall into this quadrant may earn preferential treatment options (pricing, services, correspondence etc.) By Guta Mengesha,Ethiopia
  • 70. Evolution and Growth of Supply chain  supplier preference quadrants……….. 3. NUISANCE QUADRANT The buyer has both low value and attraction. The purchaser lacks sufficient capital to meet MOQ and little to no development. Suppliers faced with these buyers take little interest in establishing any sort of relationship now or in the future. There is no practical reason to invest any resources and energy beyond what is necessary. The buyer may not pay high prices but will also not receive any add value in personalized services. If this is the case, it is absolutely necessary for the buyer to reconsider their position and work to improve – quickly. 4.EXPLOITABLE QUADRANT There may be excellent purchases but only for a few sales or a one-time deal. It is common for the supplier to quote exceptional prices specifically to exploit the purchaser. The reasoning of the supplier is sound. “Why would I invest my time, effort and resources into a one shot deal? I am going to make what I can out of this and return to my usual customer base.” It is vital the purchaser choose wisely for risk management and being overly exploited. It is very easy to be exploited when you are in a hurry to order products. There are certain methods for supplier pricing, and it is a good idea to understand them if you need products quickly By Guta Mengesha,Ethiopia
  • 71. Evolution and Growth of Supply chain By Guta Mengesha,Ethiopia supplier preference quadrants image
  • 72. Evolution and Growth of Supply chain  SPEND ANALYZE o Is the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of decreasing procurement costs, improving efficiency, and monitoring compliance. It can also be leveraged in other areas of business such as inventory management, budgeting and planning, and product development..  There are three core areas of spend analysis – visibility, analysis and process. By leveraging all three, companies can generate answers to the crucial questions affecting their spending, including: 1. What am I really spending? 2. With whom am I spending it? 3. Am I getting what’s been promised for that spend? By Guta Mengesha,Ethiopia
  • 73. Evolution and Growth of Supply chain  SPEND ANALYZE Benefit of spend analysis ➢ Identify savings opportunities ➢ Full visibility of expense ➢ Improving negotiation strategies ➢ Data driven sourcing ➢ Manage risks. ➢ Improving supplier performance ➢ Streamline operation By Guta Mengesha,Ethiopia
  • 74. Evolution and Growth of Supply chain  SPEND ANALYZE spend analysis can help you review past performance and make an assessment of future performance and trends.  Here are the basic questions we ask when analyzing expenses: • What do we buy? • How much did we pay? • How much did we buy? • Who do we buy from? • Who is the buyer? • Under what conditions did we buy? • How often do we buy? • When did we buy it? • Are the products or services consistent with our order? • Where were the items delivered (geographic location)? • How does the data compare to previous years? By Guta Mengesha,Ethiopia
  • 75. Evolution and Growth of Supply chain REFERENCE o A.T. Kearney's Seven Steps for Strategic Sourcing. (n.d.). Retrieved from Association of International Procurement Technology: https://www.aipts.org/a-t-kearneys-seven-steps-for-strategic sourcing/ o Institute, C. F. (n.d.). What is Industry Analysis. Retrieved from Corporate Finance Institution: https://corporatefinanceinstitute.com/resources/knowledge/strategy/industry-analysis methods/ o Massin, J.-P. (n.d.). The Strategic Sourcing Matrix quandrants' characteristics. Retrieved from Sourcing and Procurement: http://sourcing-and-procurement.com/the-strategic-sourcing-matrix quadrants-characteristics/ o Network, T. T. (2020, April). Retrieved from Tech Target Network: https://searcherp.techtarget.com/definition/strategic-sourcing o Philippe-Massin, J. (n.d.). Sourcing and Procurement . Retrieved from Example of a Sourcoing Tree: http://sourcing-and- procurement.com/example-of-a-sourcing-tree/ o Strategic Sourcing and Supply Management. (n.d.). Retrieved from AT Kearney : http://www.middle east.atkearney.com/consumer-products-retail/retail-capability/ /asset publisher/Jn6LoViFv6ZJ/content/strategic-sourcing-and- supply management/10192?inheritRedirect=false redirect=http3A2F%2Fwww.middle east.atkearney.com%2Fconsumer-prod o Supply, T. C. (2016). Category Management in Procurement and Supply. Profex Publishing Lim By Guta Mengesha,Ethiopia
  • 76. Evolution and Growth of Supply chain Thank YOU God is Good all the time! By Guta Mengesha,Ethiopia