The Value of Supply Strategy Business Intelligence Impact Enhanced Negotiations Risk Management Supply Continuity Internal Drivers Competitive Analysis Value Chain News Analysis Market

The Value of Supply Strategy

Presenter

Presentation Notes

Developing a category strategy really comes down to answering a single simple question: What is the capability of the world to supply products and services to Company to meet customer requirements? As you can see, this is clearly NOT a simply question? It requires that you become an industry expert in your selected category, that you be regarded as the ultimate source of knowledge to PBU’s regarding what is happening in the global supply base, and that you educate, inform, and continue to provide consultation to PBU’s on how dynamic events in the global environment will impact supply. A few keep Points for this section that don’t relate to any particular slide, but should come up based on group discussions. It is your job to become an industry expert! 2) We often hear from the businesses that Corporate goals don’t fit the business. This is something we need to change. 3) The way you spend your time is going to change. Based on our conversations it looks like it will be something like 25% spent externally out in the world 50% spent out navigating the world of Company. Telling the story verbally and learning from stakeholders. 25% spent on documenting the strategy 4) Strategy comes out of the story you can tell about the industry.

2

Fact: Vertical & Horizontal Disconnection of SCM Organizations

Customer

Supplier

SCM Organization Marketing & SalesManufacturing

Disconnection ofInternal BusinessIntelligence

Disconnection ofExternal MarketIntelligence

Loss of Innovation and Efficiency Improvement Possibilities-> Connection of Market Intelligence has to be a Supply Chain Management

Driven Approach: CUSTOMER AND SUPPLIER FACING

Presenter

Presentation Notes

Companies spend an inordinate amount of time identifying customer requirements – they need to spend the same amount of time developing supply market intelligence. Ultimately, you are the linchpin that holds together manufacturing and marketing, and provide the key to aligning customer demand with supplier capabilities. Organization data is often disconnected. You need to go out into the world and pull it all together. The integration process is described in Rob Handfield’s 2006 book, “Supply Market Intelligence.”

3

CustomersSuppliers

Suppliers’ Environment Customers’ Environment

PBUs

Company’s Environment

Customer and Market Intelligence

Supplier and Market Intelligence

Business Intelligence

Supply Chain Intelligence is the convergence of four activities (information gathering, analysis, dissemination and response) both upstream and downstream in the supply chain.

A GUESSING GAME

Traditional Focus is Here

Presenter

Presentation Notes

Companies invest huge resources in Customer intelligence and Business intelligence. Just look at the big software investments…. It started with ERP in the early 90s which is essentially focused on Business Intelligence, and then moves on the CRM (Customer Relationship Mgt) at the end of the 90s which is all about Customer and Market Intelligence. You can see what’s missing! This is clearly not an easy issue. In most companies, supply market intelligence is a guessing game – we do not spend the time required to truly understand supply requirements. This is similar to the book, “Gulliver’s Travels” – you are like Gulliver. You go out into the outside world and come back to tell people the tales of what you see. Optional: The best companies recognize the importance of this function and have their best people in supply chain.

4

SCM Enablers - Data, Information, KnowledgeSCM Processes

Supply Chain Design, Supplier Rel. Mgmt, Perf. Mgmt, Supplier Quality Mgmt, Risk Mgmt, Cont. Improvement

BI/MI Enabling SCM ProcessesGather, Analyze, & Synthesize

Data & Information

Business IntelligenceSpendDemandPerformanceFinanceQuality

Market IntelligenceMarketsIndustriesGoods & CommoditiesFinanceSuppliersCompetitorsTechnologies

DATA

INFORMATION

KNOWLEDGE

Presenter

Presentation Notes

Ultimately it is about the story you are telling. Where is the data? Where do you get it? Intelligence is good only if it is integrated into strategies – supply base segmentation-ation processes need to be transformed. Data is not the same as strategy. It requires that we understand the diverse set of primary and secondary sources of intelligence, and process and synthesize it into knowledge. Much of the most valuable information lies in the heads of stakeholders, NOT on the internet or in a document or a book! To build a good strategy, you need to spend less time at your desk and more time understanding the product and meeting suppliers and Subject Matter Experts (SME’s) There is a lot of knowledge (not just data) in the heads of Company personnel! Use it. �Jon Stegner Note: This all relates to FLOW 2 in the Company Enterprise OS Model: Developing Strategies and Capabilities – mapping to knowledge banks and capability banks to have what people need available when they need it.

5

Business Intelligence Impact

Enhanced Negotiations

Risk Management

Supply Continuity

Internal Drivers

Competitive Analysis

Value Chain News Analysis

Market Drivers

Total Cost of Ownership

Supplier Relationship Management

Presenter

Presentation Notes

Build Data from diverse set of sources Not just about T’s&C’s Market intelligence forms the basis for all components of category strategy, including risk, continuity, and negotiation planning. Diverse information from multiple sources provides a rich and informed context for planning and decision-making in these areas. One question people always ask is “How do I know when I am done?” One way to resolve that question is when you can answer all the questions related to Risk management, Supply Continuity, and negotiations.

Strategic Sourcing ProcessPhase I Phase II Phase III Phase IV Phase V Phase VI Phase VII

BusinessPlan

ProcessPlan

DataAcquisition

EvaluationSupplier

Selection & Development

Implement

PerformanceMeasurement& ContinuousImprovement

• Business Case• Spend / Gap• Team• Charter• Key stakeholder• Communication

• Baseline• Segmentation• Work Plan• Update Charter• Communication

• Current state• Hypothesis• Vision• Industry• Competition• Potential supplier• Benchmark

• Narrow supplier• Begin strategy

formulation• Benefits• Cost model• Barriers

• RFP• Negotiation

strategy• Selection• Corrective

action/ development

• Update strategy• Implementation

• Identify team• Coordination• Integrate

suppliers• Performance

measurement• Corrective

actions

• Manage relationship & performance

• Communicate• Cont.

Improvement• Follow-up

• Approved Charter

• Project Progress Report• Timeline

• Hypothesis• Strategy Profile

• Updated Profile• TAC Benefits/Cost models

• Supplier(s) Selected• Development /

Implementation Plans

• Implementation status• Progress Report

• Manage supplier relationship

• Communicate performance to supplier Improvement plans

Strategic Sourcing follows a rigorous 7-step process; activities in each step are tailored to the nature of the commodity and the supply market

ProfileSourcing

Group

DevelopSourcingStrategy

GenerateSupplierPortfolio

SelectImplementation

Path

SelectCompetitive

Suppliers

OperationallyIntegrateSuppliers

ContinuousBenchmark

Supply Market1 2 3 4 5 6 7

Understand internal spend andexternal market

Create ‘Go to Market’ approach

Identify potentialsuppliers

Determineexecution strategy

Conduct negotiations & select suppliers

Operationalize supplier agreements

Operationalize supplier agreements

Activities

ExampleDeliverables

• Identify & understand current spend/buy

• Conduct industry analysis

• Assess current sourcing practices

• Analyze potential sourcing strategies

• Review savings estimates

• Finalize project plan

• Identify new suppliers

• Generate potential supplier list

• Create and issue RFI

• Develop qualification criteria

• Screen suppliers

• Select competitive selection or supplier development

• Determine negotiation approaches

• Develop RFP execution strategy

• Develop RFP evaluation criteria

• Issue RFP• Analyze RPF

responses• Develop

negotiation strategy

• Conduct negotiations

• Recommend suppliers

• Finalize contracts• Determine

implementation implications

• Create implementation plan

• Executive implementation plan

• Develop process to benchmark supply base

• Develop process to monitor Industry conditions

• Internal spend analysis

• Industry overview & market dynamics

• Category positioning matrix

• Sourcing strategy summary

• RFI template• Qualification

criteria• List of suppliers• Short list of RFP

• RFP Template• RFP plan• Auction plan

• RFP analysis model

• Negotiation strategy template

• Auction strategy• Sourcing

recommendation

• Implementation plan

• Ongoing category review process

• Supplier report card

Operating Model

Centrally-Led

Product Led

Provide governance, lead developing of people, drive category planning, manage the supply base and ensure link and leverage

Mission

Execute category plans, conduct sourcing transactions, work closely with suppliers to ensure progress against development plan, drive supplier quality, and coordinate / ensure delivery of purchased materials on-time, at the right cost and quality

Business and Product Line Support (TDP, ADP, PDP)Production SupportSupplier Quality (Execution)Category Planning (Product-led)

Key ActivitiesCategory PlanningCost ManagementSupplier Quality and Development (Strategy)Process and Support Indirect Material and M&E PurchasingLogisticsPeople Development

Operating Model is being changed to strike the right balance between Centrally led and Product led

Global Enterprise Category Team Operational Concept

The Commercial and Engineering team is responsible for finding Innovation in the supply base that the Company can leverage:

Competitive advantage on current business

Fill technology gaps in current technology portfolio

Provide Innovative Solutions for future customer needs

Concise Commercial and Technical Strategy for each Category

Strategy and Execution are Related

• Corporate financial targets and

• President’s directives

Goals Strategies Plans TacticsObjectives

Company strategies

Category plansSub-Category plansSupplier plans PBU-Level Category plansSupplier classification

Sourcing decisionsCategory team and PBU-level agreed upon actions and timingSupplier management

Targeted achievement plans(Example: 60% best cost in region; 70% reduction in number of suppliers, etc.)Sourcing strategies

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

- Sun Tzu

Presenter

Presentation Notes

So, to paraphrase Sun Tzu, “Strategy without tactics is futile. Tactics without strategy is fatal.” Let’s look across at the arrows starting at the far left and see how strategies and tactics relate.

http://www.britannica.com/eb/article?eu=72168

11

2.1/2.2 Create / Refine / Document Product Line/PBU Strategies / Material Group Code / Sub-category

2.1/2.2 Create / Refine / Document Product Line/PBU Strategies / Material Group Code / Sub-category

2.3 Create / Refine / Document Supplier Strategies


Category Plan Development Future State Map

1.1 Compile Industry / Market Info

1.0 Compile/ Document Data 2.0 Develop Strategies 3.0 Approve Strategies

1.5 Compile Current Company APV Data

1.4 Compile Supplier Data

1.7Create / Refine / Publish Company Category Overview

1.8 Gather Key Product Line Business & Technical Information via meeting or discussion

3.1 PBU /ECT Documented Approval of Sourcing Strategies

2.4 Create / Refine/ Correlate Specific Sourcing Strategies

Q


Reports/shows journals/internet /interviews/consultants / etc

APV data from Portfolios

Business info / FTS / quality / technology / Category, MCA & Commercial Assessments / Customer Specific Requirements

1.6 Create / Refine / Publish Industry Category Overview

Priority matrix determines ECT/PBU/PL engagement level

Strategic leverage

Company StakeholdersPBUs (buyer)

Q

1. Leverage considered?2. All inputs (ECT & PL),

including action items, available?

1.3 Compile the Total Cost & Cost Management Information

1.2 Compile Category Technical Information (Eye Of the Needle Process)

Formalize input

SharePoint Document Library(documents & Action Items)

Category StrategiesHome Repository

Pipeline

How to document

approval in system?

New Information

ScheduledReview

Changing Conditions Action items / PL info

2.1/2.2 Create / Refine / Document Product Line/PBU / Material Group Code / Sub- category Strategies

Assess (1) strategy alignment across PL & Categories; (2) total cost impact; and (3) leverage opportunities

2.1-2..3 are completed based on specific need or request

QVC gates needed?

Metrics – How to measureleverage to ensure the

behavior occurs?

Presenter

Presentation Notes

Who has seen this? What are you doing with it currently? It is an attempt to take a very complex process and break it down into some meaningful check points to get a sense of where we stand and are we making progress. What makes this all work is the conversations you are having with your stakeholders.

12

Each Process is Integral to the Next

Inputs Outputs

• Suppliers Capability• Demand and Supply

trends

• Mapping of Supply Chain• Raw Material/conversion

costs

• Market Prices

• Internal Costs

• Market Trends

Process

Category Market Analysis

Strategic Cost Modeling

Commodity Price Analysis

Market Index Planning and Reports

• Individual Supplier Analysis

• Market Analysis

• Priorities for Strategic Costing

• Commodity “Should Cost”

• Relevant Price benchmarks

• Performance Analysis

• Benchmarks for Planning

• Risk Analysis for category • Cost Escalations for category• Executive Summary

Presenter

Presentation Notes

Note the final element is the executive summary – the strategy needs to be more than created, it needs to be communicated. Jon Stegner notes: Which ones are the “knowledge banks”? (outputs)

13

The main outputs drive category strategies …Cost Models Market Analysis

• Market Analysis can include:

• External Market Conditions/Trends

• Supplier Deep Dives

• Supplier Financial Health Analysis

• Market Prices/Trends

• Recommendations on suppliers based on our analyses

• Labor Cost Models:

• Industry cost models-any occupation & location

• Supplier specific cost models

• Product Cost Models

• High level product cost models

• Deep dive product cost models

Presenter

Presentation Notes

You need to understand the cost side (at the left) and the commercial side (at the right).

14

Michigan State U. Benchmarking Study: Impact of Strategic Category Management

• Cost savings5 to 15% price/cost savingsMore uniform prices between regions – One company reported 20% to 30% price

differences between locations– Another company reported a reduction in the gap of

10%

Presenter

Presentation Notes

A goal of category strategy planning is achieving linkage between Company, Company Suppliers and Company customers so that everything matches… An on-going MSU Global Procurement and Supply Chain Benchmarking Initiative (GEBN) results suggest that companies with mature category strategies experience increased prices Savings. They also have more uniform aligned pricing between regions, and can deliver value across the entire global enterprise. Eaton Steel in China example (NQS NOTE – will need to have more info on the example of Eaton’s leadership here …)

15

Michigan State U. Benchmarking Study: Impact of Strategic Category Management

• Other savingsReduction of logistics cost from 3% to 2% of cost of sales.Lower operating costs of up to 15%Improved quality – typically from 10 to 20% of yieldInventory reduction from 15% to 30%Improved on time delivery to 20%Reduced lead times by 20%Improved productivity – 4 to 20%Improved communication between functionsEnhanced strategic role of procurementDevelopment of a learning organization

Presenter

Presentation Notes

Additional savings from various companies are shown here.

Gathering Data

Presenter

Presentation Notes

In the first section, we will address our category planning process map 1.1 – how do you get started gathering data. Who here is experiencing or anticipating data challenges? What are you encountering?

17

Consultants andResearch Providers

Industry Associations

Headlines Suppliers

Trade Journals & Periodicals

Company AnnualReports & 10-Ks

Internet PBU leaders, PLPMs,

colleagues

There are many sources of market and supplier information

Presenter

Presentation Notes

There are multiple sources of market and supplier information available. The key here is to TRIANGULATE – which means that you need to explore, compare, and contrast data from multiple sources before you can validate it. Triangulation is part of the scientific method – and requires that you establish corroborating data to validate a given hypothesis. The more data points you have supporting the hypothesis, the greater the likelihood that the hypothesis is correct. Your job is to go through these sources and identify key elements that support your hypothesis. Trade journals are a great place to start. In annual reports make sure you read the notes to investors. Internet is great but don’t forget the power of books. The power of snow-ball sampling Company is willing to pay for research, and check their marketing publications. Industry associations you don’t go for the presentations. You learn in the Bar. You’ve got to be scanning the headlines. Suppliers are about the best sources. Don’t just talk to sales people. Talk to the line and their purchasing people. Jon Stegner Note: We also need to consider another source: Investment Advisors / Banks

18

1.0 Compile/Document Data

• Typical DataIndustry Category OverviewDescription of the CategoryTotal Market ValueMajor Applications Product Segmentation Cost Management PracticesIndustry Efforts and InitiativesBreakdown by Major Supplier/ProductIndustry Structure and Global Reach

Presenter

Presentation Notes

These are the typical types of documents you need to complete in your Phase 1 review. Each of these elements provides a different angle on the market, and helps to shape people’s thinking. The more you know, the more you will figure out different questions to ask. Jon Stegner Note: What are the major Knowledge Banks that the data will feed?

Choosing Analysis Tools

Presenter

Presentation Notes

Back to the general principle: Drive to Insight We know that data isn’t enough. We are now going to take a look at 5 tools that help you turn data into a meaningful story. A call to action. They also, help to tell you where you need to gather more data. Before we go there, we need to dispel some common myths about strategy creation.

20

Theorists Approach – Linear

Collect Data

Conduct Analysis

CreateStrategy

Presenter

Presentation Notes

If you read to many books strategy development can start to look a straight line march. In our experience working with real companies developing real strategies it doesn’t work that way.

21

Test Hypothesis

Best Practices Approach

GatherData

Conduct Analysis

Develop and Refine Strategy

Develop Hypotheses

Engage Resources

Test Hypothesis

Presenter

Presentation Notes

In fact this represents the scientific method. The scientific method applies because we collect data, conduct analysis, and come to a conclusion regarding the research. In this case, the data will lead you and your team to a strategy, that will optimize the upside cost savings potential to Company. Triangulation is key here. You begin by gathering data and developing hypotheses. A hypothesis is very simply an unproven opinion – it is what you believe is a truth about what is happening the marketplace. But without data, a hypothesis is just an opinion. You need to be able to validate your hypothesis with data. The first place to start is to engage your PBU’s, and share with them your thoughts. They may come back and say that you need to modify the hypothesis, as it is not fully developed, or it needs to be “tweaked.” So you might go back and do that – and then go back and collect additional data to re-shape the hypothesis. Then you might go out and interview suppliers, conducts secondary research, and analyze spend data to fully validate or disprove the hypothesis – this is the process of disciplined imagination and triangulation that leads to the establishment of a theory, that becomes the basis for your strategy.

Sample Hypotheses

• Resin costs should drop as the cost of oil drops.

• Our business case for harness providers is not sustainable.

Presenter

Presentation Notes

For each hypothesis, you need to answer: Why would we think that? How do you test it? What’s the result? Add your own examples!

23

Market Analysis Tools

• Converting Data into Insight– Supplier Analysis– SWOT (Strength, Weakness, Opportunity, Threat) – Value Chain – Risk Analysis– Porter’s Five Forces

Presenter

Presentation Notes

Just because we are talking about the 5 tools here doesn’t mean that you always have to use each of them. They aren’t always equally effective: For each tool we are going to consider: What data do you need to make it work. (Certain tools require certain kinds of data.) Where do you get that data. (So if you need to track down the data you can go find it.) What the tool provides. (This is really about what part of the story will it help you tell or what kind of argument will it make.) When do you use the tool. (Helps you to figure out what kind of problem it will give you insight into.) Finally we will walk through how you would actually apply it and, for most of them, give you a chance to play with it. (Jon Stegner Note: We also have quantitative tools we can apply – Six Sigma, Cost/price curves We need to apply them in the right way when appropriate. Additional content in this area to be identified...)

24

Supplier Analysis

• Data needed to make the tool workCompany APVCurrent relationshipsKnowledge of industry playersSupplier customer baseAnnual revenue of suppliersCompetitors and competitive position

• Where do you get the dataSuppliersInternal CompanyPBU partnersInternetIndustry associationsTrade publicationsConsultants & research providers

Presenter

Presentation Notes

Let’s talk about supplier analysis you are already engaged in. What do we do currently? How does this help us develop strategies? What else do we need to be doing here? Reinforce the value of current efforts and the impact of gaps. Odds are that participants will cover each of the points. If they miss something come back to it. The first of these is an in-depth supplier analysis. You will need to get APV data, and also identify who your current suppliers are. Jon Stegner Notes on Data Needed: Annual revenue for suppliers – need to incorporate their outlook for profit Another data source: Risk Assessment from the New Model Launch process Other Data Sources: Banks and investment advisors Manufacturing Capability Assessment

25

Supplier Analysis

• What the tool providesCost structureFinancial statusCustomer satisfaction levelsSupport CapabilitiesRelative strengths and weaknessHow Company fits in their businessHow Company is viewedCore capabilitiesStrategy/future directionCulture…The list goes on as the journey proceeds

• When do you use itContinuous, on-going process

Presenter

Presentation Notes

From this analysis – you should be able to develop the following issues. Note that these elements will provide an in-depth set of deep-dive insights into each supplier’s capabilities and competencies. Ask: What have you learned from your supplier analysis work to date? Reinforce the value of the work and the challenges they present. As you can see, this is a critical element of all our work. It is an on-going discipline. Optional Ask: If it is so wonderful why isn’t enough?

26

SWOT Analysis

• Data needed to make the tool workCan provide insight even with limited data (Often a good way to figure out what data you have and where there are gaps.)

• Where do you get the data fromAny of the sources mentioned so farOften a good tool for a dialogue

• What the tool providesA quick sketch of where you standA preliminary call to actionQuick picture of circumstances

• When to applyAnalysis of individual divisionsAnalysis of individual suppliersMarket situation

Presenter

Presentation Notes

Who here has used a SWOT Analysis? How did it help? What are its limitations? Bullet Point 1: Data needed to make the tool work: One of the great things about SWOT is that you don’t need a lot of data. Helps to identify gaps in your data Good way to work with important qualitative data Bullet Point 2: Where do you get the data: Any data source can provide fodder for a SWOT Great way to engage people Bullet Point 3: What the tool provides: Really highlights differences in the interpretations of data Very helpful in prioritization efforts Bullet Point 4: When to apply: SWOT analysis is a very easy tool to use – and can be applied on the spot during a team meeting. It uses qualitative data, and can be used to help frame an issue in a team meeting, and bring out people’s assumptions and can provide you with an opportunity to introduce different ideas/flexibility in thinking which can be very beneficial as you work with a variety of stakeholders.

27

SWOT Analysis

Opportunities Threats

Strengths Weaknesses• Broad customer base• Established product

range• Established

distribution channels

• Emergence of other uses and markets for products

• Emerging overseas markets

• High barriers to entry

• Low product innovation

• Traditional, unionised business processes

• Low patent protection

• Emerging overseas suppliers

• New product development costs are high

• Environmental regulations

Internal Factors

External Factors

Presenter

Presentation Notes

Key Points: Internal means that you or the organization you are analyzing has control over changing it. Provide examples. External means forces over which no one organization has control. Provide examples. In thinking through actions, the goal of course is to minimize weakness and threats, and exploit strengths and opportunities. You are trying to generate or test a hypothesis.

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Value Chain Analysis• Data needed to make the tool work

Steps in the process of creating a productSteps in product sales and/or distributionTechnology involved“Dirt to the suppliers door”

• Where do you get the dataAssociationsInternet Industry researchEngineering books

• What the tool providesUnderstanding of supplier cost structureUnderstanding of how suppliers add valueIdea of where you want to participateBenchmarks for valueAbility to better predict pricingBottle-necks that can constrain availability

• When to applyWhen you think there are steps that can be cutGenerally works best when everyone in your supply base has a similar value chain (e.g. commodities)

Presenter

Presentation Notes

Value chain analysis is used to help identify the cost savings opportunities that exist within the supply chain. The goal is to be able to understand and identify and exploit cost savings opportunities that may have been overlooked by PLPM’s or even by suppliers in bringing the products and servcie to the location appropriate. Bullet Point 1: Data needed to make the tool work: Good value chain analysis requires a deeper understanding of how something is made. You will need to make prioritization decisions about how far back you go in the supply chain Bullet Point 2: Where do you get the data: Books are actually one of the best sources Industry journals Track what your suppliers are tracking Bullet Point 3: What the tool provides: Provide some examples from your experience Bullet Point 4: When to apply: Good analysis can help you figure out where you want to play. Eg. Buying steel vs. buying stampings. Best results when all players in industry have same kind of supply chain. e.g. will show very meaningful data if you are looking at something like resins. Much less valuable for something like air-craft engines or the whole plane! The more complex and differentiated the product the less you will get out of value chain analysis. (Jon Stegner note: Connect to value stream example from Lean training from Womack’s book, “Learning to See.” )

29

Sample Value Chain Analysis

Source: The Society of the Plastics Industry, Inc. and Management Horizons, A Consulting Division of PricewaterhouseCoopers LLP.

PolymerizationSmall molecules linked together

RawMaterialsNatural GasPetroleumCoal

RefiningBasic compounds extracted and converted to feed stocks

PolymersResins(giantmolecules)

Manufacturing(film production)

Feed- stocksMonomers (small molecules)

MaterialSourcing

Resin Production

FilmExtrusion Conversion

End-User

Distributor

Finished Product

Presenter

Presentation Notes

You’ve got to know the high-level elements of the chain. Jon Stegner notes: What are the benefits of a value chain analysis? Identify where the waste and risks are Identify value add and improvement opportunities Identify bottlenecks Identify Cost Drivers

30

• Looking further into the value chain and analyzing the market, we can understand the high level cost structure and cost drivers

• Typical cost drivers are:Raw material availability and costsDegree of product customizationResearch and DevelopmentYieldSupplier high profit marginsComplex distribution networkScale

Suppliersources

componentsAssembly Storage &

distribution SalesRawmaterials

Suppliersmanufacturecomponents

100%

10% 20% 15% 10% 15% 30%COST

Suppliers’ Cost Elements

Presenter

Presentation Notes

Xerox example-when Cannon came to market with a copier that was less than Xerox’s cost. Cost and technical team can help here.

31

Our Challenge – Defining Categories

• Categories Definitions DrivePrioritiesAvailability of dataSupplier communicationsPBU expectationsValidity of analysesView of current stateView of future possibilities

Presenter

Presentation Notes

One of the critical decisions you will need to make is how you want to define the category. Generally if you are doing good supplier analysis and have enough data to do a supply chain analysis you can begin to wrestle with defining the categories. Segmentation also helps drive prioritization efforts. Provide some examples from personal experience about how/why this is challenging.

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Inputs

• Supplier analyses• Value chain analysis• Industry definitions• Material group codes• Stakeholder expectations/standards

PBUEye of the NeedleCost

Presenter

Presentation Notes

Don’t get overly attached to material group codes. Those may not be meaningful units of analysis in the industry. (Note: You may need to provide more background on statement area to be sure the group understands what we mean by this. For example: Material group codes describe how we buy things and how we use them. But what they don’t necessarily describe is the market/industry and application Over-loyalty to material group codes may cause you to miss opportunities or misread information about the market.)

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Characteristics of Suppliers that “Fit” within a Market Segment

• Similar production process

• Similar supplier sources

• Similar material content/ complexity

• Similar product specifications

• Similar Technology

• Similar Supply chain

• Similar Internal value chain

• Similar Customers and markets

Copy PaperCopy Paper PensPens

Office Supplies Office

Supplies

Key Question:

At what level do we define the market?

Where does the team have

maximum bargaining

power?

Incr

easi

ng

Bar

gain

ing

Pow

er

Look for Patterns

Writing Utensils Writing UtensilsPaperPaper

Legal Pads Legal Pads PencilsPencils

Presenter

Presentation Notes

You need to figure out what is the “unit of analysis?” What will you analyze and among which things will you make comparisons. You also end up deciding at what level you would source. ��For example: Do you want to buy and analyze the cost/quality/availability of pens and pencils or would you rather be comparing the costs and merits of office supply companies.

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Risk Analysis

• Data needed to make the tool workThe impact of certain products on CompanyMajor suppliers in the industryTypical failure points

• Where do you get the dataPBUCostEye of the needle teamBuyers

• What the tool providesCost/benefit of risk mitigation strategiesCall to action to change the status quo

• When to applyYou suspect there are hidden risksStakeholders do not recognize risk

Presenter

Presentation Notes

In our experience there are typically lots of products and lots of suppliers but relatively few risk points. Risk is composed of two components: Impact and probability Provide an example. Bullet Point 1: Data needed to make the tool work: You need to know enough about Company business to assess the impact You need to know enough about the industry and suppliers to assess the probability of problems. Bullet Point 3: What the tool provides Managing risk always incurs cost and effort Only do it where you need to Bullet Point 4: When to apply Stakeholders often require a lot of education here …until something goes wrong.

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Common Areas of Risk

• Product quality/service• Supply continuity• Technology dependency• Supplier dependency• Currency exchange fluctuation• Business cycle• Political• Geographic• Intellectual Property

• Plant downtime• Yield• Regulatory compliance• Health & safety• Environmental

Business Risks Operational Risks

Presenter

Presentation Notes

Provide some examples.

36

Operational Risk Assessment Example

Presenter

Presentation Notes

These are helpful questions to ask to assess the risk of a particular commodity. A commodity/ part focused approach

37

Supplier Risk Example

Rev

enue

Impa

ct

Risk Probability Index (RPI)

The following slides will show how the mitigation process works. Specifically:

• Supplier Identification

• Effects of Mitigation

• Reduction in Risk

In the example case, there are several suppliers in the yellow and red zones.

The example will follow “Alcoa” – currently in the yellow zone, with medium RPI and medium revenue impact.

Risk Distribution Matrix – by Supplier

Presenter

Presentation Notes

Here is an example of a more sophisticated approach focused on suppliers.

38

The Bar Chart report shows the supplier risk index rankings within the group. The color coded zones help direct the priorities for mitigation activities..

Alcoa is in the yellow zone indicating medium or long term mitigation action.


Presenter

Presentation Notes

Back to the idea of prioritization of risk.

40

Risk Reduction by Shifting Supply from High to Lower Risk Suppliers

Result: Significantly reducing the disruption risk of $170 million in revenue impact from an RPI

of 20.3 to 18.9 (-1.4%).

Action:Shift supply from Alcoa to Alga, Tek, and

AIP Thermoform

Presenter

Presentation Notes

This is an example of the call to action that can come from risk analysis.

41

Prev Cur Change Prev Cur Change Prev Cur Change Prev Cur Prev Change

Prent

2382.01 85

1) Low BSC business/Prent revenue 2) High SRIM%

1) Allocate more resources such as inventory 2) Contigency plan for backup

367.71 367.71 0 14.32 14.32 0.00 1.9 1.9 0 100.02 100.02 16.77% 0.00%

Alcoa

1156.22 36

1) Low BSC business/Alcoa revenue 2) Slow response to technical problem 3) High employee and senior staff turnover rate 4) Low market bargain power 5) Sole sourced material 6) Poor quality

Move to Prent, Alga, and Computer Design. 170.29 0 -170.29 20.31 0 -20.31 3.0 0.0 -3 103.75 0.00 17.39% 100.00%

Perfecseal460.34 6

No survey response Get survey response 109.13 109.13 0 38.00 38.00 0.00 4.3 4.3 0 178.32 178.32 29.90% 0.00%

Alga

200.61 9

1) Low BSC business & profit margin/Alga revenue 2) No regular information sharing with tier II suppliers 3) High MRR

1) Consolidate other thermoform business to Alga 2) Help develop regular information sharing system with tier II suppliers 3) Quality audit

44.98 130.00 85.02 17.76 17.76 0.00 2.5 2.5 0 19.98 57.73 3.35% -189.02%

TEK165.47 9

1) Low BSC busines/TEK revenue 2) Cost structure is not shared

1) Consolidate other thermoform business to Alga 2) Negotiate for cost structure

18.59 77.10 58.51 16.89 16.89 0.00 2.4 2.4 0 7.54 31.25 1.26% -314.74%

AIP

78.99 1

1) Overall interest alignment is low 2) Slow response to technical problem 3) Low engineer support 4) Small employee size 5) No regular information sharing with tier II suppliers 6) Low market bargain power

Consolidated to other vendors 23.25 50.00 26.75 22.07 22.07 0.00 3.0 3.0 0 15.40 33.11 2.58% -115.05%

Risk Factor ChangeSRIM SRIM% ChangeRev Impact (MM) Risk Probability Index RPI Risk Index RIRisk

Zone Vendors Risk Reason MitigationSpend (K) Part#

Risk Report (Supplier View)

The Risk Report - by Supplier provides a view of the risk indices and progress for each supplier in a category . The current status and mitigation actions are input by the commodity managers to provide detailed metrics and a mitigation report for each supplier.

1029.72 1029.71 23.48 21.79 3.0 2.8 -0.25596.48 571.92 4.12%


Presenter

Presentation Notes

If risk is real, it is worth tracking and seeing how your decisions and supplier actions impact it over time.

42

Porter’s Five Forces Model• Data needed to make the tool work

Major players in the industryFinancial conditions of the playersThreats to the industry

• Where do you get the dataPublicly available financial dataiSupply iAlertIndustry overviewsInvestor industry analysis reports

• What the tool provideslong-term picture of the industryBroad perspectiveCompetition for demandWhere do we have leverage

• When do you use itStakeholders are overly focused on short-termStakeholders have unrealistic expectations about supplier behaviorPredict degree of supplier flexibility Understand competitive threats they face and where you can add value

Presenter

Presentation Notes

Porter’s five forces is a heavy-hitting strategy development tool that is used widely for business strategy development and sales and marketing strategies. The five forces are the forces that shape an industry. Michael Porter’s industry analysis methodology was introduced in his book Competitive Strategy, first published in 1980 and now on its 60th printing. The powerful tool provides understanding of an industry with a simple framework. Bullet Point 1: It takes a lot of data to make it work Bullet Point 2: Where do you get the data Everything we’ve talked about so far plus the bullets here Bullet Point 3: What the tool provides This tool helps predict supplier/buyer behavior in the marketplace. Bullet Point 4: When do you use it? This is as close to a crystal ball - a means to predict the future - as we are likely to get, so it is a powerful education tool. When you understand supplier needs you figure out how you can help them help you.

43

As a variation of the Porter’s framework, additional forces are sometimes examined. These are “globalization,” “digitization,” and “de-regulation.”

Source: Competitive Strategy, Michael E. Porter, 1980

MarketInternal

Competition

Pressure fromSubstitutes

Buyer BargainingPower

Threat of New Entrants

SupplierBargaining

Power

Porter’s Five Forces Analysis

Presenter

Presentation Notes

These are the basic elements. Walk through an example like steel. New entrants: Chinese and Indians Buyer Bargaining power: Consolidating specs Pressure from subs: Growth in composites, thermosets, carbon fibers Supplier bargaining power: US consolidation. Shipping costs. Ask: What will the implications be for Company then on steel?

44

Implications: Suppliers may not offer better pricing if they are captive to their suppliers or are squeezed by their position in the value chain and there may be an opportunity to buy at a different point in the value chain.

Porter’s Five Forces – Supplier Bargaining Power

Factors Influencing Suppliers’Bargaining Power

• Prices of major inputs• Ability to pass on price increases• Availability of key technologies or other resources• Threat of forward or backward integration• Industry capacity utilization• Supplier concentration• Importance of volume to supplier

Presenter

Presentation Notes

Provide examples.

45

Criticality to Buyers

• The concentration of purchase volumes in a market defines the relative strength and negotiating power of the buyers.

• The buyers’ ability to influence the market demand is directly proportional to their ability to influence suppliers behaviors.

• The more critical the item being purchased, the lower the buyer’s negotiating power

Presenter

Presentation Notes

Ask for examples… One from our experience is the company that produces the grit to polish silicon wafers. It is critical and they are the only one. Even Intel couldn’t drive price reductions.

46

Criticality to Buyers

Characteristics of Critical Items Characteristics of Non-Critical Items

Product is in short supply Product is purchased in large volume compared to other customers

Client’s purchasing volume is small relative to most other customers

Product is undifferentiated

Product is a large portion of the overall cost

Backward integration is possible

Strong$

Strong$

Weak$

Weak$

A few buyers purchase most of suppliers’ output.

Suppliers have many buyers to choose from.

Factors Influencing the Buyers’Bargaining Power

Buyer concentrationBuyer volumeBuyer switching costsPrice sensitivityProduct differencesBrand identityImpact on quality or performanceBuyer profitsAvailability of substitutes

Presenter

Presentation Notes

Examples for us.

47

• Capital markets• Availability of skilled workers• Access to critical technologies, inputs or distribution• Product life cycles• Brand equity/customer loyalty• Government deregulation• Risk of switching• Economies of scale

Factors Influencing the Threat of New Entrants

Porter’s Five Forces – Threat of New Entrants

Implications: Suppliers may be eager to offer improved terms to keep new companies from entering the market and new market entrants may offer improved terms to gain a foothold.

Presenter

Presentation Notes

There is a lot money out there in capital markets. Example of Intel vs. AMD Wiring/Harnesses example Microsoft vs. the world.

48

Porter’s Five Forces – Threat of Substitutes

• The threat or availability of alternate products in a market also affects the relative strength and influence the buyer can exert.

• Possibility of a switch to a substitute increases options and leverage

Presenter

Presentation Notes

These are the things that wake up the CEO in the middle of the night. Don’t want to get “Amazon” -ed.

49

Porter’s Five Forces – Threat of Substitutes

Original Product/Service

Substitute Product/Service

Paper grocery sacksAirline travelPrinted formsSteel pipeElectricityGrocery stores

Plastic grocery sacksVideo conferencingElectronic formsPVC pipeCo-generated powerInternet

EXAMPLE

relative performance of substitutesrelative price of substitutesswitching costsbuyer propensity to substitute

Factors Influencing the Threat of Substitutes

50

Internal Competition

• Higher levels of internal competition increase buyer options and supplier flexibility.

Speed of industry growthCapacity utilizationExit barriersProduct differencesSwitching costs Diversity of competitors

Factors Influencing the Market Internal Competition

Presenter

Presentation Notes

Provide examples.

51

Internal Competition

Negotiating Strength

NumerousCompetitors

High Fixed Costs

High Exit Barriers

Excess Capacity

Perishable Products Suppliers may be eager to offer

improved terms not to lose their volume and revenue to their

competition

52

L H

H L

L H

H L

H LMarket Competition

Entry Barriers

Threat of Substitutes

Impact of Inputs

Criticality to Customers

Suppliers Hold theBalance of Power

Buyers Hold theBalance of Power

Sourcing Implication

Balance of Power as Input to Supply Strategy

Source: Competitive Strategy, Michael E. Porter, 1980

Presenter

Presentation Notes

Walk through…

53

Supplier Analysis

SWOT Porter’sFive-ForcesS W

O T

Summarizing the Market Analysis

A Compelling Story—Basis for Strategy

Value Chain

Risk Analysis

Preparing Documentation

55

Company Templates

• Value of documentationEstablish base linesEasy referenceBasis for dialogues

• Value of standardizationEase of interpretationEase of consolidation and trend spotting

• Dangers of standardizationBecomes roteMay not tell the story you need told

56

Industry BackgroundIndustry Background Industry BreakdownIndustry Breakdown

Category Description:

Describe this category and the important characteristics.

Total Market Value:

Estimate what is the total market value of this category globally.

Major Applications:

Identify the major applications in/of this category.

Product Segmentation:

What is the product segmenting within this category ? (i.e. Commodity, Niche, Near Core, Core)

Cost management practices:

Indicate if there is a common cost management practice or methodology used in the industry.

Category Name OverviewOwner: Global Enterprise Category Team Manager Name

Category Name OverviewOwner: Global Enterprise Category Team Manager Name

Seg 2, $118 , 22%

Others, $20 , 4%Seg 5,

$70 , 13%

Seg 4, $43 , 8%

Seg 3, $26 , 5%

Seg 1, $254 , 48%

Breakdown by Market SegmentBreakdown by Market SegmentFor graphs above: Identify and size the major market segments in this category (e.g., Automotive, Medical, Consumer, Electrical, Industrial etc.). Identify and describe the major suppliers in this category and their share of the market.

Additional Comments Relative To Major Market Segments / Suppliers

Supplier B, $118 ,

22%

Others, $20 , 4%

Supplier E, $70 ,

13%

Supplier D, $43 ,

8%

Supplier C, $26 ,

5%

Supplier A, $254 ,

48%

CDApproved and Agreed By

Next review:08/200608/2007

Approval:Date of...

57

Barriers to EntryBarriers to Entry

Industry Structure and Global ReachIndustry Structure and Global Reach

• How easy it is for suppliers to drive up prices?

• How many supplier choices do you have? The fewer the supplier

Supplier PowerSupplier Power

• How easy it is for buyers to drive prices down?

• How important is each individual buyer to your business? How expensive is it for them to switch from your products and services to those of someone else?

• Are buyers often able to dictate terms to you?

Buyer PowerBuyer Power

• What is important here is the number and capability of your competitors ?

• Will your suppliers and buyers go elsewhere if they don’t get a good deal from you?

Competitive Rivalry / Intensity

of Competition

Competitive Rivalry / Intensity

of Competition

• How easy is it to substitute what you provide?

Threat of Substitution

Threat of Substitution

• Are there economies of scale?

• Are the costs high or low of entry?

• What is the ease of access to distribution channels?

• Are there cost advantages not related to the size of the company

• Will competitors retaliate?

• What can be the impact of government action (effect of legislation)?

• How important is differentiation?

Presenter

Presentation Notes

This is another view of Porter’s 5 Forces…�Where is the power? �What are the underlying dynamics? These need to be described so someone who is not familiar with the dynamics can understand and see how the industry is structured

58

Manufacturing

List the manufacturing trends – in terms of global sourcing and BCC sourcing

Globalization/Footprint

Note the global trends and how they may affect BCC sourcing

Legislation

Provide details around any specific legislation in any part of the world impacting the buy and how does it impact the category in general.

Cost Drivers

Ascertain how costs of related commodities (input) affect the category. What are the cost drivers?

Other

Market Trends (consumer,supplier, regulatory)

Market Trends (consumer,supplier, regulatory)

Market, Technology, and Competitive TrendsMarket, Technology, and Competitive Trends

New Technologies

List any new technologies that are impacting this category.

Substitutions

List the technologies that will be phased out in the near term and what are the new technologies that will replace these existing products.

Technology Trends and Road Map

Technology Trends and Road Map Global FactorsGlobal Factors

Significant Global Factors:

Identify and list the major global factors (for example political, geographical, technological, meteorological and any other factors) that affect the category and note how they impact this category.

59

Provide comments / suggestions.

List major issues or directions

Category Team Leader CommentsCategory Team Leader Comments

Documents

The Value of Supply Strategy Business Intelligence Impact Enhanced Negotiations Risk Management Supply Continuity Internal Drivers Competitive Analysis Value Chain News Analysis Market