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Purchasing and Sourcing Strategy: Trends and Implications
OMTEC Conference June 24, 2009
Robert J. Trent, Ph.D. Lehigh University Bethlehem, PA
Session Objectives
I. Identify the trends and changes that have affected (and will continue to affect) purchasing and sourcing
II. For each change or trend, we need to ask (1) what is driving this change or trend and (2) how will this change or trend affect your company?
q Where does our information come from? q From data collected annually at the Michigan State Executive Supply Chain Management Seminar, 19901999
q Global Electronic Benchmarking Network, 19942000 q Project 10X Worldwide Focus Groups, 20002002 q Global Sourcing Research Project, 1999ongoing q Supply Management Organizational Design Study, 2004 q Ongoing primary and secondary research for book publications
Trends and Implications
Strategic Supply Management— Creating the Next Source of Competitive Advantage
EndtoEnd Lean Management—A Guide to Complete Supply Chain Improvement
Managing Global Supply and Risk—Best Practices, Concepts, and Strategies
Purchasing and Supply Chain Management
Late 2009
Change at the Industry Level
Outsourcing is a major part of our business model
We control most our production requirements internally
Suppliers extensively impact our ability to compete
Suppliers minimally impact our ability to compete
Purchases make up an extensive portion of revenues
Purchases make up a small portion of revenues
Suppliers are primarily global Suppliers are primarily domestic
Competitors are primarily global Competitors are primarily domestic
Customers exert intense pressure to improve
Customers exert minimal pressure to improve
Our industry features a rapid rate of technological change
Our industry features a slower rate of technological change
New product development cycle times are shortening rapidly
New product development cycle times are stable
Competitors are rapidly improving their performance
Competitors are slow to improve their performance
Dynamic Stable
Trends and Implications
Cost of Revenue as a Percentage of Total Sales
11% Bank of America 25% Merck 45% Intel 45% General Electric 46% ColgatePalmolive 49% Procter & Gamble 73% Caterpillar 74% Textron 75% John Deere 75% Alcoa 80% General Motors 82% Ford 82% Dell 83% Boeing
Source: Recent financial statements, http://finance.yahoo.com
Trends and Implications
Cost of Revenue as a Percentage of Total Sales
24% Zimmer 28% Smith & Nephew 29% Johnson & Johnson 32% Stryker
Source: Recent financial statements, http://finance.yahoo.com
q Since the latter 1980s and throughout the 1990s we witnessed a visible revolution in the supply management business model that companies pursue
q We are now witnessing a less visible yet equally revolutionary change in how companies manage information and supplier relationships
Trends and Implications
Trends and Implications
Selected longerterm agreements No formal agreements or short term agreements
Contracting
Proactive process focus, longer term
Task and transaction focus Focus
Generalized, draw support and participants from other functional groups
Specialized, minimal cross functional experience
Skills
Crossfunctional, crosslocational, and crossorganizational design features
Functional Organization
Rationalized/Optimized Large Supply Base
Report to the executive committee Dispersed throughout lower levels Reporting Level
Now… Then…
Trends and Implications
Horizontal flow across functional groups and enterprises
Vertical flow within the purchasing function
Information Flow
A rigorous process guides the development of companywide strategies
Strategies are reactive, ad hoc, or nonexistent
Strategy Development
Sharing of information and technology roadmaps with suppliers, longer term planning horizon
Share shortterm production schedules
Planning
Involved early Involved late Product Development
Lowest total cost, impact on corporate indicators
Price focus Measurement
Cooperative/collaborative relationships with select suppliers
Adversarial Supplier Relationships
Now… Then…
q Let’s see how we got from “Then” to “Now”
Trends and Implications
q Since 1990, companies have have emphasized certain activities, processes, and strategies at an increasing rate
Trends and Implications
So…What are these activities?
Strategies/Activities Changes during the 1990s:
Benchmarking against other leading firms
+146%
Use of full service suppliers +125%
Joint ventures, including supplier partnerships
+117%
Supplier technology demonstration days
+96%
Value analysis/value engineering
+96%
Global sourcing +74%
Trends and Implications
Strategies/Activities Changes during the 1990s:
Total cost of ownership supplier selection and management
+72%
Computeraided design interface with suppliers
+71%
System or subsystem sourcing +67%
Crossfunctional teams for sourcing decisions
+62%
Single sourcing +44%
Supplier recognition through awards
+43%
Trends and Implications
Use of FullService Suppliers
Customer demands are forcing companies to look to all areas to support customer and business requirements. One equipment company’s experience...
Produce and Sell a Product
Provide a Full Product- Service Package
• Establish an office to lease trucks to customers that choose not to purchase
• Establish a used equipment company so customers can dispose of equipment
• Establish a rental unit for customers with shortterm equipment needs
• Hold spare parts inventory with rapid replenishment, or allow customers to hold inventory on a consignment basis
• Produce and deliver high quality equipment, on time, at a competitive price
• Perform daily service on customer’s fleet through outsource maintenance contracts
• Provide capital services to help customers finance their equipment purchases
• Offer extended warranties and service
• Develop total cost of ownership models to help customers optimize fleet operations
The Full ProductService Package
From... ...To
New Skill Requirements
Thriving in today’s sourcing organization requires a new set of skills
Strategic or holistic focus rather than operational or transactional focus
Ability to understand your company’s competitive business model
Ability to work in or support non traditional procurement areas
Electronic business understanding and competency
Process management knowledge and understanding
Ability to understand statistical analysis and factbased decisions
Emerging Skill Requirements
Ability to manage critical supply chain relationships worldwide
Strong knowledge of strategic cost management
Trends and Implications
q Most companies will continue to reduce the total number of suppliers they maintain l Top 80100 suppliers will receive a majority of purchase dollars
q The percentage of longerterm contracts to total contracts and the percentage of the dollar value of purchases on longerterm contracts will continue to increase
q Expect supply organizations to be increasingly willing to take direct action to develop the performance capabilities of supply chain members l Most development efforts have been historically reactive
q Foreign purchases will continue to increase gradually
q Expect a continued increase in purchase volume accumulation or consolidation to occur. Furthermore, companies will increasingly focus their consolidation efforts worldwide rather than across domestic units only
Trends and Implications
Level II Level V Level IV Level III Level I
Engage in Domestic Purchasing
Only
Engage in International Purchasing AsNeeded
International Purchasing as
Part of Sourcing Strategy
Integration and Coordination of Global Sourcing
Strategies across
Worldwide Locations
Integration and Coordination of Global Sourcing Strategies with
Other Functional Groups
International Purchasing Global Supply Management
Current* Future*
Expected Change
13.4% 21.3% 31% 18.1% 16.1% 7.8% 7.8% 14.3% 15.6% 54.5%
42% 63% 54% 14% +238%
* Percent of companies operating or expecting to operate at a particular level
N = 169
Worldwide Sourcing Levels—2001
Level II Level V Level IV Level III Level I
Engage in Domestic Purchasing
Only
Engage in International Purchasing AsNeeded
International Purchasing as
Part of Sourcing Strategy
Integration and Coordination of Global Sourcing
Strategies across
Worldwide Locations
Integration and Coordination of Global Sourcing Strategies with
Other Functional Groups
International Purchasing
Current* Future*
Expected Change
8.4% 20.1% 18.8% 22.7% 29.9% 5.9% 6.5% 7.8% 20.9% 58.8%
30% 68% 59% 8% +97%
* Percent of companies operating or expecting to operate at a particular level
N = 165
Worldwide Sourcing Levels—Currently
Global Supply Management
q Executive management’s perception of supplier and supply management importance toward achieving strategic goals and objectives will continue to increase
q Expect to focus extensively on time as a competitive weapon, particularly during q New product/process/service development q Supplier evaluation and selection q Customer order fulfillment
q Companies will continue to outsource activities and requirements that are not part of their core competency or core capability
Trends and Implications
Trends and Implications
What is a core competency?
What are the three test for determining if something may be
a core competency?
Supply Management’s Changing Role
Higherlevel outsourcing will shift how procurement and supply organizes its activities and responsibilities
Component Outsourcing System Outsourcing
q Manage thousands of component part numbers and suppliers
q Manage hundreds of standard contracts
q Manage transactions
q Employ many buyers
q Practice traditional relationships with most suppliers
q Manage 100 or fewer critical suppliers
q Manage strategic relationships
q Develop alliances and partnerships
q Pursue crossorganizational integration
q Practice valuecreating sourcing activities
q Rely on systems suppliers to manage component suppliers
Characteristics: Characteristics:
q Companies will continue to develop formalized systems for measuring supplier performance (i.e., scorecards) but they still are lacking
q Expect increased development of minimum levels of acceptable supplier performance
q Expect a continued increase in the measurement of purchasing/sourcing function’s contribution and performance, particularly in areas that directly affect a company’s competitive position l Example—Contribution to revenue, EVA, ROI, RONA
Trends and Implications
q Expect continuous improvement in cycle time, cost, quality, and delivery performance, both internally and from external supply chain members
q Reliance on external suppliers as a source of product and process technology will continue to increase
q Spend management will continue to grow in importance
Trends and Implications
q Progressive supply organizations will increasingly analyze and segment their purchase requirements during strategy development
Trends and Implications
Segmenting Relationships and Approaches
Critical Items Collaborative relationships
Cost focus Win/win approaches
Transaction Items Transactional relationships Transaction cost focus Win/lose approaches
Leverage Items Cooperative relationships
Cost focus Usually win/win approaches
Market Items Competitive relationships
Price focus Win/lose approaches
Qualified Suppliers
Value
Few Many
Low
High
Items = purchased goods and services
The Four C’s of Supply Relationships
Counter Productive Competitive Cooperative Collaborative
• Also called antagonistic relationships
• Parties work actively against the needs of each other
• Neither party takes responsibility for what happens in the relationship
• Destructive conflict occurs
• Also called adversarial relationships
• Parties engage in competitive struggle over fixed value
• Parties attempt to maximize value for their side
• Minimal sharing of information
• Parties work together and share information
• Closer relationships are a result of mutual goals
• Supplier and customer involvement increases
• Congruence of goals exists
• Parties work together to create new business opportunities
• Parties work jointly to identify creative solutions to problems
Lose/Lose Win/Lose Win/Win
q The advantages derived from managing relationships proactively with select suppliers will continue to increase
Trends and Implications
Supplier Relationship Management
l Many changes and trends are causing an interest in stronger supplier relationships… l Reliance on fewer total suppliers with increased use of longerterm contracts—switching costs are becoming higher
l Entrance of new global competitors makes the pressure to improve relentless and severe
l Many differentiating product features and technology come from the supply community
l A focus on core competencies and core capabilities leads to the outsourcing of some important value chain activities
Supplier Relationship Management
l Many changes and trends are causing an interest in stronger supplier relationships… l A belief that supply chains rather than companies compete—can we ignore relationships?
l Pressure to provide a full productservice package to customers increases our reliance on suppliers
l Supply market constraints are causing buyers to want to be a “preferred customer” with suppliers
l Fear of realizing a competitive disadvantage l Other?
Supplier Relationship Management
l We can pursue stronger relationships with select suppliers through… l timely and complete supplier performance feedback l formal supplier assessment of your company as a customer
l integrative (rather than distributive) negotiation processes l organizational design features that support relationship management such as executive buyersupplier councils
l trust building activities and actions l cooperative cost management techniques
Supplier Relationship Management
l We can pursue stronger relationships with select suppliers through… l supplier suggestion programs with joint sharing of savings
l ethical and fair treatment of suppliers l supplier involvement during new product development l working to better understand supplier requirements l use of SRM information technology systems l joint improvement activities, such as value analysis l other?
Supplier Relationships and Trust
l Various research projects have concluded that trust is a major predictor of supplier relationship success
l Trust refers to the belief in the character, ability, strength, or truth of the party(ies) in a relationship
l Two primary dimensions… l Characterbased trust l Competencybased trust
Supplier Relationships and Trust
l Examples of trustbuilding actions and activities between a buyer and seller… l Open and frequent communication across organizations l Colocating personnel l Following through on promises and commitments l Acting legally and ethically in all dealings l Acting on the behalf of the relationship rather than self
interests l Publicizing success stories and personal narratives,
especially those that enhance the standing of the other party
l Treating information and data gathered within the relationship as confidential
l Other?
Understanding Supplier Expectations
l A longerterm business arrangement
l Fair financial return and treatment
l Adequate time for planning l Accurate forecasts l Minimum number of change
orders l Early involvement
opportunities l Efficient negotiating
processes l Sharing of cost savings ideas
l Correct and firm material specifications and requirements
l Parts designed to match the supplier’s process capability
l Smoothly timed order releases l Sharing of information l Protection of proprietary
information l Payment in a reasonable time l Ethical treatment l Objective performance
feedback
What do suppliers want from a B2B relationship?
Future Supply Management Predictions
6.00 Your business unit’s suppliers will be expected to increasingly provide valueadding service in R&D, engineering, manufacturing, order fulfillment, and systems integration
6.09 Your purchasing/sourcing/supply activities will increasingly become centrally led with decentralized execution
6.11 Your business unit’s supply strategy will be to enhance crossenterprise relationships with core suppliers to achieve a higher level of cooperation and enhanced business and technical integration
6.13 Suppliers will be expected to take on a greater cost management role based on guidelines/ expectations established by your business unit
6.17 Your business unit will take an active role in ensuring the adequacy and execution of the supply strategies of critical tierone suppliers
6.20 Sourcing will become increasingly involved with other functional groups and processes
6.29 Your business unit will develop more comprehensive knowledge of supplier capabilities and will better leverage this knowledge to your advantage
6.31 Highlevel information sharing will play and increasing role on future relationships with suppliers
6.33 Your business unit will increasingly emphasize crossfunctional sourcing teams to leverage expertise and strategies across your organization
6.58 The ability to integrate and manage strategic suppliers will be considered a core competency and will not be outsourced
6.67 Your business unit will increasingly collaborate with suppliers to identify and reduce costs throughout the supply chain
Likelihood Rating Delphi Study Predictions
Scale: 1= low likelihood, 7= high likelihood Source: Ogden, Petersen, Carter, and Monczka, “Supply Management Strategies for the Future: A Delphi Study,” The
Journal of Supply Chain Management, Summer 2005, p. 43.
Supplement: Expected Design Features in Purchasing and Supply Management
Organizational Design Features
l Executive leadership committee to centrally coordinate and guide sourcing strategy
l Customer advisory boards that include suppliers
l Buyersupplier councils to integrate and align with key suppliers
l Crossfunctional/crosslocational teams to manage critical supply activities and commodities
l Supplier participation on new product and process development teams
l Organizational structure designed around supply chain processes
l International purchasing offices to support global sourcing efforts
Organizational Design Features
l Separate strategic and operational purchasing positions and authority
l Physical colocation of procurement personnel with internal customers
l Chief procurement officer reporting to the CEO or executive committee
l Executive responsibility for supply and demand chain planning and execution
l Virtual organizational design linked through IT systems
l Global strategy coordination and review sessions
l Lead site buyers or personnel to manage noncommodity items
Thank you!
Any questions or comments?
