The document discusses how supply management can better inform integrated business planning processes. It argues that supply management needs to have a seat at the table and prepare by assessing risks, building an analytical foundation, and creating opportunities through various scenarios. These scenarios could leverage opportunities through collaboration, contract structuring, and strategic purchasing approaches. Getting supply management involved helps ensure decisions are made using a holistic perspective rather than just individual functional views.

1. Supply Management: The Missing
Voice in the Integrated Business Plan
How Cost Management, Negotiation and Contract Management
Inform the Process and are Essential to Its Execution
Arnold Mark Wells, CPIM
25 August 2011

2. How can we align and integrate decisions
toward a common goal?
?
Business decisions from various functions are often not aligned. Yet unless we
can align them, moving the business forward is difficult.
© 2011 End-to-End Analytics, LLC 2

3. Myopic, incomplete perspectives will not yield
integrated business planning
When decision-makers
are looking at different
decision variables, but
not the whole equation,
they are forced to make
assumptions.
© 2011 End-to-End Analytics, LLC 3

4. The Dangers of Dis-integrated Decisions
“When I was a physicist, someone would come to me from time to time
with problems in mathematics he could not solve. He wanted me to
check his numbers for him. But after a while I learned not to waste my
time checking the numbers, because the numbers were almost always
right. However, if I checked the assumptions, they were almost always
wrong.”
The Goal by Eli Goldratt
So, while a single business function makes a “good”
decision based on a subset of inputs, their “numbers”
may be right, but the explicit or implicit assumptions
about other business functions may render the
functional decision a poor one for the company overall.
© 2011 End-to-End Analytics, LLC 4

5. “Little” Sales and Operations Planning
S&OP started as a tactical effort to line up production, sales and
inventory.
Other business functions
Inventory need to be included for
decisions that are
integrated and strategic.
Sales Production
? ?
?
• e.g. PSI Report
• The focus was tactical so the terms were common
• But it was only part of the picture from a strategic point of view
© 2011 End-to-End Analytics, LLC 5

6. “Big” S&OP Process
S&OP has evolved into an holistic strategic process
1. Strategic Planning
 Rationalize Products, Channels, Customers
 New Product Planning
 Align Pricing 2. Demand Planning
 Alignment to Corporate Goals  Quantitative Forecasting
 Supply Network Design  Sales, Marketing Input
 What-if Analysis
5. Executive Management  Orders/Demand Balancing
 KPI Measurement
 Consensus
 Plan vs. Actual The Integrated Business
 Waterfall Analysis Decision-making or
 Root Cause Analysis
Planning Process (IBP) is
 Continuous Improvement
both multi-functional and
multi-dimensional
4. Financial Planning
 Product Line Profitability 3. Supply Planning
 Constraint Management  Capacity Planning
 What-if Analysis  Inventory Planning
 Allocation of Demand to Supply  Logistics
 Analyze Revenue, Margin and Working Capital Impact  Risk and Opportunity
Planning
 Identify Gaps between S&OP and Strategic Goals
© 2011 End-to-End Analytics, LLC 6

7. Including Supply Management in the Process
Participation and Preparation
Participation - getting a “seat at the table”
 Establish transparency to supply risks and opportunities
 Engage proactively with other functions – understand their goals and
challenges within the integrated business planning context
 Create supply management scenarios that will enable other functions
to meet their goals
 Strive for mutual accountability
Preparation for Participation
 Assess the risks
 Build the analytical foundation for creating opportunities
 Create scenarios to leverage opportunities
© 2011 End-to-End Analytics, LLC 7

8. Preparation for Participation
The Supply Management Funnel to IBP
Assess Build Leverage
Risks Foundation Opportunities
Integrated
Business
 Supplier Viability Planning
 Bargaining Position  Develop Sourcing  Collaborate
Strategy
 Capacity &
Dependency Risk
 Structure and Manage Contracts
$
 Analyze Total Cost of
Ownership  Purchase Strategically
 Price Trends and
Exchange Rates
Following the process in the funnel enables the steps for participation
by supply management in the integrated business planning process.
© 2011 End-to-End Analytics, LLC 8

9. Preparation for Participation
Assess Supply Risks
Assess Build Leverage
Risks Foundation Opportunities
Integrated
Business
 Supplier Viability Planning
  Collaborate
 Bargaining Position Develop Sourcing
Strategy
 Capacity &
 Structure and Manage Contracts
$
Dependency Risk  Analyze Total Cost of
Ownership  Purchase Strategically
 Price Trends and
Exchange Rates
© 2011 End-to-End Analytics, LLC 9

10. Preparation for Participation
Assess Risk - Analyze Supplier Viability
Drivers of Viability
 Balance sheet (working capital, debt)
 Income statement (profitability)
 Cash flow (sufficient, positive)
 Breadth of customer base
 Competitive threats
 Technology
 Will the supplier‟s technology become obsolete?
 Will the supplier be able to support the next generation of your product?
 Relative size – takeover target?
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11. Preparation for Participation
Assess Risk - Analyze Bargaining Position
Key Commodity, Component, Material or Service
Percent of Buyer‟s
Annual Purchase Least Leverage Some Parity; Key Opportunity for Innovative Supply;
(High) Detailed Knowledge of TCO is Important;
Integrated decisions for an organization should be informed by
bargaining position, which is a multi-faceted concept. This is one
example of a way to visualize bargaining position.
Percent of Buyer‟s
Annual Purchase
Least Important Quadrant Greatest Leverage Quadrant
(Low)
Size = Price (low, average, high)
Percent of Supplier‟s Business Percent of Supplier„s Business
Color = Overall Relative Bargaining Position (strong, moderate, weak)
(Smallest) (Largest)
© 2011 End-to-End Analytics, LLC 11

12. Preparation for Participation
Assess Risk – Supplier Capacity and Dependency
Commodity A Commodity B
Commodity A
10% Committed from Current, Approved
20%
Suppliers
35%
50% Additional Potential Commitment from
20% Current Suppiers
50%
10% Opportunity for Other Supply
5% 35%
50% Potential Risk to Supply
Commodity C Commodity D
0%
20% Systematically identify and
10% graphically depict where the
5%
capacity of your suppliers
20% 60% and broader capacity puts
100% supply at risk.
© 2011 End-to-End Analytics, LLC 12

13. Preparation for Participation
Assess Risk - Pricing Trends and Exchange Rates
Quantitatively know the risk
from purchase prices and
exchange rates where
applicable.
© 2011 End-to-End Analytics, LLC 13

14. Preparation for Participation
Build the Foundation for Potential Supply Opportunities
Assess Build Leverage
Risks Foundation Opportunities
Integrated
Business
 Supplier Viability Planning
  Collaborate
 Bargaining Position Develop Sourcing
Strategy
 Capacity Risk
 Structure and Manage Contracts
$
 Analyze Total Cost of
Ownership  Purchase Strategically
 Price Trends and
Exchange Rates
© 2011 End-to-End Analytics, LLC 14

15. Preparation for Participation
Build the Foundation for Opportunities – Sourcing Strategy
R&D, marketing, operations and sourcing decisions are
interdependent and need to be integrated
 New product development must coordinate carefully with sourcing
 New markets may require new sources
 New manufacturing techniques may require sourcing changes
 Demographics, service models and legal requirements must be
considered in sourcing strategies
 Need to be able to consider internal vs. external sourcing and to what
degree and propose a plan that will support the business strategy for
maximum revenue growth, return on net assets, margins and market
share – objectives of S&OP/Integrated Business Planning
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16. Preparation for Participation
Build the Foundation for Opportunities – Analyze TCO
You need to understand both sides of the equation
 Buyer  Supplier
 Price  Price
 Planning  Time value of money (Payment terms)
 Execution  Commitment
 Quality  Expediting
 Value added services  Design changes
 Taxes
 Time value of money (financing/payment terms)
 Cost of holding inventory
Understanding TCO and your sensitivity to it can lead to
innovative arrangements and profitable outsourcing
 Price x for payment in 45 days
 Price y - x for payment in 30 days
 Outsourcing analysis
© 2011 End-to-End Analytics, LLC 16

17. Preparation for Participation
The Supply Management Funnel to IBP
Assess Build Leverage
Risks Foundation Opportunities
Integrated
Business
 Supplier Viability Planning
  Collaborate
 Bargaining Position Develop Sourcing
Strategy
 Capacity and
 Structure and Manage Contracts
$
Dependency Risk  Analyze Total Cost of
Ownership  Purchase Strategically
 Price Trends and
Exchange Rates
© 2011 End-to-End Analytics, LLC 17

18. Preparation for Participation
Leverage Opportunities – Collaboration Scenarios
Transactional Collaboration
 Easily supported by technology
 Automatic, systematic communication for larger, more important suppliers
 Regular, manual communication and transactions for smaller suppliers
Beyond transactions, what can be done?
 Co-investment on reducing changeovers
 Offering long term commitment for frequent replenishments
 Pickup vs. delivery
 Parcel or less-than-truckload deliveries in exchange for ??
Other Areas of Potential Collaboration
 Requirements (time-phased view into what you anticipate your needs will be)
 Design (can be design of indirect materials as well – think marketing
materials, etc.)
 Technology
© 2011 End-to-End Analytics, LLC 18

19. Preparation for Participation
Leverage Opportunities - Contract Structure & Management
Scenarios
In order to create a win-win scenario, you have to know the
following:
 TCO
 Your sensitivity to its components
 How much money can be saved in total
 How much you want to capture (or can afford to share as
leverage with your supplier)
 How to structure the contract for maximum flexibility and
minimum risk (e.g. Vested Outsourcing)
© 2011 End-to-End Analytics, LLC 19

20. Supply Management Contributions – Opp.
Leverage Opportunities – Contract Structure & Management
Scenarios
Considerations for Flexibility and Risk
 Potential range of future requirements by period
 Minimum and maximum quantity in units for each period
 Unit price by period, fixed or market dependent
 Lead time commitment
 Understanding regarding cancellation or changes to orders
 Minimum and maximum quantities over a range of periods
 Minimum order quantities
 Sequential capacity expansion options, each of which might
have its own lead time and associated payment for expansion
cost
 Other
© 2011 End-to-End Analytics, LLC 20

21. Preparation for Participation
Leverage Opportunities – Strategic Purchase Scenarios
Strategic Purchases
Requirements + Quantity Discount + Forecasted Price +
Inventory Holding Cost + Risk of Obsolescence
Normal
Material Price
Purchases
Dollars
Predictive and prescriptive analysis
Time
© 2011 End-to-End Analytics, LLC 21

22. Summary
Getting Started
Participation - getting a “seat at the table”
 Establish transparency to supply risks and opportunities
 Engage proactively with other functions – understand their goals and
challenges within the integrated business planning context
 Create supply management scenarios that will enable other functions
to meet their goals
 Strive for mutual accountability
Preparation for Participation
 Assess the risks
 Build the analytical foundation for creating opportunities
 Create scenarios to leverage opportunities
© 2011 End-to-End Analytics, LLC 22

23. Supply Chain and Pricing Expertise Analytical Know-how
Arnold Mark Wells, CPIM
Principal
End-to-End Analytics, LLC
955 Alma St., Suite B
Palo Alto, CA 94310
330 546 2404
mark@e2eanalytics.com
Superior Supply Chain Performance Through Data-Driven Analysis
Powerful, Visual, Interactive Excel-based Tools
Also:
• mark@arnoldmarkwells.com
• http://arnoldmarkwells.wordpress.com
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