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Moving from purchasing to strategic sourcing
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Sourcing & Optimising Strategies
Managing Strategic Supplier Relationship & Collaboration
Anand Subramaniam
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“The most difficult thing in the world is to know how to do a thing and to watch
somebody else doing it wrong, without comment.”
- T. H. White
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Highlights
Drivers for Change
Buyer / Chief Purchasing Officer - Challenge
Supplier Base Optimisation
Strategic Sourcing Process
Supplier – Financial Analysis
Risk Management
Supplier Evaluation (Performance Audits)
Drivers for Change
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Today…
Re-focus on process capabilities
Organisations are / need changing
Supply Market and Sourcing Strategies are changing
Warehousing & Transportation are getting sophisticated
Increased use of technology and suppliers’ capabilities - to obtain visibility of the supply chain
Chief Purchasing Officer / Buyers
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Do you know… Who are your key suppliers?
What is your organisation total spend each year?
What is the spend by category / supplier? (Eg. raw materials, IT)
What is the total acquisition cost (TAC) & the life cycle cost of capital purchases?
What is the value your suppliers provide towards your organisation’s success and reputation?
How to manage vendor performance?
What are the purchasing risks and how to manage it?
What are you Out / In-sourcing?
Whether your purchasing strategies are aligned with business strategies?
What percentage of your external spend is managed by purchasing?
Do you assess the outcome of your negotiations?
How do you develop your key suppliers?
What financial metrics to focus on?
Supplier Base Optimisation
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80 / 20 - Rule
Analysis to identify, 20% of suppliers receiving the majority of purchase dollars
Identify the minority of suppliers causing the majority of problems
80/20 rule assumes the best suppliers receive the majority of purchase dollars
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Optimisation - Why & What
With too large a supply base, the challenges Supplier integration Collaborative agreements Supplier development Joint total quality/cost reduction efforts
To determine the right mix of capable suppliers Optimisation does not only mean adding or reducing suppliers.
It can mean switching suppliers, also !! Optimisation does not mean supply base reduction
As companies continue to rely on fewer total suppliers, the selection process takes on even greater importance
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Optimisation - Benefits
Reduced supply base risk
Lower transactions costs
Leverage leading to lower purchase costs
Ability to pursue value-added activities
Opportunity to work with world-class suppliers, which leads to improved value chain performance
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Optimisation - Critical Success Factors
Time
Cross-functional teams
Supplier measurement system
Strategy development process that considers optimisation goals
Overall supply base vision with Senior Management support
Strategic Sourcing Process
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Evolution of Sourcing
Cross-functional teamsGlobal
Commodity Teams,Center-led or centralised
DecentralisedBuyers
People
Technology enablementacross all strategic sourcing processes
Auctions, eSourcing,Basic optimisation
SpreadsheetsTechnology
Global; Highly collaborativeacross the enterprise andvisible at executive levels
Multi-regional,Some collaborationwith related functions
Local; Many suppliers
Reach
Balancing Total System Cost;Maximising shareholder value; Enabling productinnovation
Supplier rationalisation,Spend consolidation,Cycle-time reduction,Standardisation
Price,Transactionmanagement,Compliance
Focus
EnablementProjectTransactionParadigm
Adapted from FreeMarkets Supply Evolution
TraditionalPurchasing
StrategicSourcing
Global SupplyManagement
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Strategic Sourcing Process
AnalyseSpend
IdentifyRequirements
AnalyseMarket
ImplementStrategy
ManageNegotiations
Award & Contract
DevelopStrategy
TraditionalProcurement
StrategicSourcing
Supplier Evaluation and
Selection
Supplier Evaluation and
Selection
SupplierManagement
SupplierManagement
SupplierDevelopment
SupplierDevelopment
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Analyse Spend
Buyer
Buying analysis across all divisions
Total number of suppliers used
Compare pricing across divisions
Consolidate spend, reduce suppliers and obtain better pricing
Tools Spend Analysis
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Identify Requirements
Buyer Users - product and service requirements
Quality requirements Product specifications Service performance expectations
Identify different requirements across divisions Consolidate opportunities
Tools Specifications Surveys Interviews
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Analyse Market
Buyer Specific market conditions
Rising input costs, capacity constraints, barriers to entry
Supply base constituents Many players, dominant players
Analyse new products, services or diverse suppliers
Tools Internet research Benchmarking
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Develop Strategy
Buyer
Based on the internal requirements, industry dynamics Negotiate with current supplier(s) Bring in new suppliers Bid
• Reverse Auction• Traditional RFI, RFP, RFQ
Tools eSourcing tools Cross functional teams Project Management
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Manage Negotiation
Buyer Develop criteria for evaluating proposals based on internal
requirements
Initiate negotiations under chosen strategy
Compare and rank results based on key criteria
Tools Online RFX Weights / Scoring Models Standard templates Reverse Auction
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Award Contract
Buyer Based on results, determine best overall supplier(s)
Cross-functional team decision
Finalise contract terms and conditions with suppliers Involve finance and legal
Tools Automated weights / scoring Online contract management Cross functional teams
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Implementation Strategy
Buyer Determine how contract will be rolled out
Change management strategy
Identify and track performance metrics
Communicate value to stakeholders
Tools Supplier Performance Supplier Portals Spend / Diversity Reporting
Supplier Financial Analysis
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Financial Analysis - When & Why..
When do it? For critical items For new suppliers When pursuing longer-term agreements For purchase requirements involving significant
dollars
Why do it? To manage business risk To eliminate marginal suppliers early in the
evaluation process
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Ratio Analysis
Profitability How profitable is the supplier? What rate of
return is the supplier earning? Gross and net profit margin Return on equity Return on investment
Liquidity How capable is the supplier of meeting short-
term cash needs? Current ratio Quick ratio
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Ratio Analysis (Contd.)
Leverage Is the supplier over-leveraged and capable of paying
long-term obligations? Debt to assets Time interest earned Fixed charge coverage
Activity How effectively is the supplier managing assets?
Inventory turnover Average collection period Return on net assets
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Contract Management
Termination (Escape) clauses
Service Level Agreement (SLA’s)
Clear communicated specifications
Key Performance Indicators (KPI’s)
Feedback and review on a regular basis
Liquidated damages for poor performance
Risk Management
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Risk Minimisation
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Supplier Performance
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Improvement Action Plan
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Supplier Audit Check Sheet
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“If you want to make enemies, try to change something.”
- Woodrow Wilson (1856-1924)
