Value creation procurement role in supply chains
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This lecture slide was prepared for my guest lecture session in Bina Nusantara University's undergraduate program of International Business Management. It discussed the role of procurement function in an organisation, and how the function has been continuously evolved to meet market expectation by engaging business partners, as well as intra-company stakeholders. It shares top tips of how buyer can create value-add to the business from the book “Value-Added Purchasing” written by Eberhard E. Schening, PhD. Enjoy this as a part of your learning journey!
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Value creation procurement role in supply chains
- 1. Dhanis Puspa Maharani, S.T., MSc March 2016
- 4. A study of financial, procurement and procure-to-pay professionals working in large businesses, by e-invoicing provider Tradeshift, found that 92% of respondents believe supplier collaboration is essential to driving value in the business (CIPS, 2015)
- 7. The Evolution of Purchasing Role ProcessDepartment Function Sources PartnersVendors Suppliers Focus ValuePrice Cost Interacts with other units & contributes to competitive advantage Managed cross- functional core process jointly w/ stakeholders Clerical Provide cost saving & improvement ideas Streamline supplier bases for increased productivity => mutual relationship Suggesting essentially reactive inputs Driving down cost Add value for competitive advantage Squeeze vendor for better price
- 8. The Role of Purchasing in Value Chains Organization Supplier Purchasing Internal Customer External Customer Upstream Downstream Purchasing’s linkages in value chain • Understand & serve their needs • Advise • Participate in cross-functional teams • Inquire about their requirement • Offer suggestion • Provide link of supplier base • Manage selection & monitor • Lead continuous improvement of supplier quality, cost & cycle time • Obtain suggestion & involvement
- 9. 7 Steps of Sourcing Strategy
- 10. Cost Service Time / Security of Supply Business Needs Quality Innovation Flexibility High quality measurement, robust and reliable solutions Rely on local geographical presence to be able to receive timely technical service Obtain innovative solutions for unique product handling needs, packaging designs, and line layouts Business Needs Across Strategic Axes Uniqueness Commonality Variety of products and packaging requirements, line speeds, requires innovative suppliers to challenges specs. Standard solutions can be used in many cases Need for Uniqueness Vs. Commonality 1 – Understand business needs
- 11. Leverage Category Strategic Category Non-Critical Category Bottleneck Category High High Low Low BusinessImpact Supply Market Complexity Category Positioning Matrix Strategic Differentiator Leverage volume, alliance or preferred relationship Non-Critical Reduce time and effort but get best price Leverage Use competition to get best value Risky Bottleneck Reduce risk, simplify, grow volume or exit Get partnership to standardize a high quality set of products and assure last innovation by building a transparent preferred price list and R&D collaboration 2 – Category Positioning
- 12. Cross- Functional Participation 3 – Identify Potential Suppliers
- 13. Play leading roles in cross-functional teams : • Sourcing teams – manage & select suppliers • Operations teams – execute sourcing strategy & monitor performance • New product teams – develop new products Today’s Purchasers
- 14. Supplier Selection Sources of Supplier Information Published Internal Personal Internet, catalogue, yellow pages, etc Supplier file, technical personnel, etc Professional colleague, supplier sales personnel, trade fair, etc Selection Criteria Preliminary Screening Supplier Visits Financial Information Exploratory Information Questionnaires Rejected Candidates Candidate List Detailed Study Approved Supplier List
- 15. Which force is dominant in the market? Which is weakest? H (“green”), M (“yellow”) or L (“red”) rating What is customer’s bargaining power and its ability to drive benefit from opportunities? H, M, L rating Threat of New Entrants Power of Customers Threat of Substitution Rivalry of Existing Companies Power of Feedstock Suppliers Focus on key suppliers to develop standard solutions that help us to leverage the competition and improve TCO Assess Supply Markets - Porter Five Forces
- 16. New Product Development Marketing Research Product Design Production Planning Materials Acquisition Product Manufacturing Product Information STEPS Marketing Product Engineer Product Engineer Purchasing Production Marketing Conventional Production Marketing New Process Advanced Process Cross- functional Team Extended Enterprise Team • Purchasing • Internal Customer • Supplier • Supplier’s supplier Static, Reactive, Tactical Dynamic, Proactive, Strategic roles of purchasing & supplier have changed…
- 17. Business Needs and Priorities OEE and Sigma operating performance improvements, greater speed to innovation, cost effective capital investment, greater flexibility. Executive Summary Statement Nowadays every single plant selects their inspection and detection partners considering min. quality limits. More demanding safety and quality regulations and the trend to harmonize specs make critical to search for higher solutions. The Sourcing Strategy is to leverage EU/global scale selecting three preferred suppliers to hold innovation with cost effective agreements that permit us to be the best in class vs. competitors and client of choice for suppliers. Sourcing Objectives Sourcing Strategies Tactics Review and Alignment: Procurement R&D Quality Engineering Select the 3 right preferred suppliers to bring innovation, reduce cost through harmonization and global agreements and improve service # 1 Concentrate business activity with 3 core inspection and detection suppliers and minimize dilution of spend and garner greater ongoing support from these suppliers - become the “customer of choice” for these suppliers 1. Maintain alignment with global engineering and R&D on the core group of suppliers with which to share business plans and solicit bids . 2. Facilitate further spend concentration by using same core set of suppliers 3. Negotiate Value Packages with the core group of suppliers to reduce TCO. (Get further discounts: from 5% to 15% in Eq. & 10% in services ) # 2 Maintain a strong competitive bidding environment for capital project for with 3 preferred suppliers to swift and challenge regional and technology innovation position 1. Facilitate bid evaluation process and selection of best bid by establishing a common electronic bidding template for use across all BUs and regions 2. Bundle bid events, where feasible, across regions and across businesses 3. Supplier challenges and pilot trials to select the best supplier in each field # 3 Follow up challenging suppliers for certain applications: low cost, high innovative ideas 1. Develop robust and consistent supplier evaluation criteria and KPIs to optimize and regularly monitor the selection of core and challenging suppliers 4 - Execute Sourcing Strategy
- 19. Cost Analysis Definition Objectives Systematic examination of cost components • Determine the factors affecting cost • Assess the potential of cost reduction
- 20. Ten Commandments of Cost Containment 1 When in doubt, check it out Asking cost breakdown to get insight of supplier’s operation 2 Use life cycle cost analysis Examine the treacherous cost of owning & using the product 3 Use value analysis to eliminate the unnecessary cost By improved efficiency or improved effectiveness 4 Urge suppliers to reduce cost continually Encourage supplier for cost reduction & share the savings with customers 5 Challenge all requests for price increases Ask supplier to justify & substantiate any price increase
- 21. Value Analysis Project Identification Information Gathering Follow Up Implementation Decision Making Analysis Speculation The Value Analysis Process Project Identification Asking questions Impact measurement Of selected change Selection of a particular action Examine cost & performance impact Creative approaches for better performance Can we reduce cost or improve performance? Change material? Change material? Eliminate ? Substitute ? Modify? Combine? Asking questions Change tolerance ? Change design? Change speci- fication? Change process?
- 22. Ten Commandments of Cost Containment 6 Ask suppliers what you can do to contain cost Suggest supplier ways in which customer can help reduce cost 7 Drive purchasing cost savings to the bottom line Actively participate in budgeting, commit to specific saving level & deliver it 8 Don’t make hasty outsourcing decisions Look before you leap 9 Focus your efforts on the “critical few” purchases Find opportunities for significant saving 10 Play hard, but fair Treat suppliers as you would like to be treated
- 23. Other Cost-Commandments Tools IDENTIFICATION OF COST DRIVER Determine things that influence cost of goods & services from external suppliers, including : • Specifications & material • Product or service design • Policies & procedures • Worker skill & training • Employee attitude & turnover • Tools & equipment • Shipping & handling method • Buying & shipping volumes PROCESS MAPPING Reveal hidden costs of unnecessary step & rework Process Engineering Goal : Less consumption . More customer friendly . Less costly REVERSE ENGINEERING Takes apart the competitive product to determine its operation & costs (particularly if supplier unwilling to provide cost information) BENCHMARKING Comparison of an organization’s costs to those of other organizations as a factual basis for managing them COST MANAGEMENT Aims to bring cost in line with the customer’s value perceptions to strengthen competitiveness by boosting efficiency or productivity, reducing cycle time, and redesigning processes or products
- 24. Major contributor to organizational performance SOURCING To enhance organization competitiveness Led by broadly skilled professional Using latest business tools CONCLUSION: PROCUREMENT
- 25. Historical Purchaser • Bureaucratic paper pusher • Reactive, tactical, clerical Professional Purchaser • Manage interactive processes • Reduce cycle time & cost • Improving quality Evolving Role of Purchasing evolving Internal & external partnering World Class Performance
- 26. Purchasing Professional Possess Top 10 Skills • Total cost analysis • Negotiation strategies • Supplier partnering • Ethical conduct • Supplier evaluation • Quality techniques • Purchasing strategy • Price/cost analysis • Electronic data interchange • Interpersonal communication PROFESSIONAL PROFESSIONAL PURCHASER High-performance Team Groups of broadly skilled employees who jointly own & manage a process
- 27. The New Purchasing Professional Think & act strategically to strengthen the competitiveness Purchase from sources to bring the best value Implement a comprehensive purchasing management information system to leverage organization total spending Discover leading supplier by purchase amount Discover who buys what from whom & how across different units of organization for ability to aggregate purchase Relationship orientation (partnering w/ selected suppliers for long term)