Strategic Sourcing in the New Millennium

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Strategic Sourcing in the New Millennium

• Financial Executives Institute
• Presented by Rusty CarpenterVice President
  General ManagerAmerican Express Consulting
  Services

Chicago, Illinois May 25, 2000
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Topics

• Where Procurement is Today
• Evolution of Procurement
• Effects on the Purchasing Organization

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Some Questions to Ask...
How good is compliance to purchasing policies?
Have you selected a vendor for e-purchasing?
How much do you spend?
How much do you know about e-purchasing?
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Reducing Baseline Costs vs. Increasing Revenues

• Cutting expenses is easier than increasing
  revenues because it is a pro forma exercise where
  companies can...

• Manage it
• Prove savings through reporting
• Implement faster
• Identify results via EPS impact
• Realize immediate savings as opposed to
  projecting increased revenues

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Forces _at_Work
Several elements affect the decisions pertaining
to entering and maintaining a strategic sourcing
platform
Supply Chain Efficiencies
Mergers Acquisitions
Technology
Strategic Sourcing
Globalization
Psychology
Organization
Market Expectations
Financial/ Economic
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Corporate Restructuring Technology
Applying technical advances to administrative
tasks reduces the cost of baselines, alters the
composition of an organization and provides the
ability to concentrate on strategic initiatives
Large Administrative Staff
Technology
Strategic Sourcing

• Check orders
• Verify cost centers approvers
• Faxing orders
• Repetitive sourcing
• Creates reports

• Internet access
• Digital catalogs
• Email approvals
• EDI
• Dynamic reporting

• Contract negotiations
• Sourcing better deals
• Vendor analysis

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Technology Adoption Life Cycle
Over 200 Fortune 1000 corporations use a
pre-packaged e-purchasing application
Technology Adoption Life Cycle
Chasm
Number of Users
Time
Innovators
Laggards
Early Majority
Early Adopters
Late Majority
Source Crossing the Chasm, Geoffrey A. Moore
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Evolution
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The Procurement Playing Field has Changed
All members of the supply chain are participating
in e-commerce thereby providing more sources to
procure goods
Local Implementers/VARS
Wholesaler/ Distributor
End User
Manufacturer
Software Company
Ingram Micro
Computech
Customer
Computer Company
Printer Company
Companies are for illustrative purposes only
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The Evolution of Sourcing
Long cycle times were an obstacle to achieving
lower prices
Past
Present
Future

• Characteristics
• Paper based
• RFPs
• Long-term contracts
• Long cycle times

Price
Market Price
Time
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The Evolution of Sourcing
The introduction of direct to supplier
purchasing and on-line bidding has improved
procurement costs and timing
Past
Present
Future

• Characteristics
• Direct to supplier e-purchasing
• Improved cycle times to purchase
• Increased competition
• Alliances
• Better-than-market prices
• Suppliers buying the business

Price
Market Price
Time
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The Evolution of Sourcing
With the emergence of e-commerce, companies must
try to realize and lock-in spot market prices
Past
Present
Future

• Characteristics
• Auctioning (Reverse and Forward)
• Consortium buying
• Faster marketplaces, spot buying
• Exchanges

Price
Long-Term Contracts
Market Price
Spot Market Prices
Time
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Changing Business Models
Over the last 12 months, several different
electronic procurement business models have
evolved
Direct to the Supplier
Supplier
Internet
User
Supplier
Supplier
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Changing Business Models
Over the last 12 months, several different
electronic procurement business models have
evolved
Direct to the Supplier
Supplier
Internet
User
Supplier
Supplier
E-Purchasing Applications
User
Internet
Internal Server
Supplier
User
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Changing Business Models
Over the last 12 months, several different
electronic procurement business models have
evolved
Direct to the Supplier
Supplier
Internet
User
Supplier
Supplier
E-Purchasing Applications
User
Internet
Internal Server
Supplier
User
Digital Marketplaces
3rd party
User
Supplier
Internet
User
Supplier
User
Supplier
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Sourcing Savings Opportunities
As goods become more customized and advanced,
greater savings opportunities can be achieved
Indirect
Commodities
Standard Type Goods
Custom Components
5-10
15-40
Savings from E-purchasing

• Factors to Consider
• Fragmented supply base
• Size and attractiveness of spend
• Real requirements (supply and demand)
• Speed to savings

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Spending Quadrants
Selecting the most appropriate and advantageous
procurement mediums enable a company to realize
the greatest savings and benefits

• Capital
• Energy
• Transportation

• Cost of Goods Sold

Recommendations Quad I - Utilize preferred
supplier relationships and ad hoc searches Quad
II - Consortium buying, reverse auction for long
term contracts Quad III - Capitalize on excess
inventory marketplaces, spot markets Quad IV -
Conduct spot market buying hedge with long term
fixed price deals
SPECIALTY III
STRATEGIC IV
Cost of Goods/ Indirect Operating
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Dollar Size of Purchase

• Business Retail

• MRO
• Services
• TE

SUNDRY I
STAPLES II
80
5
Indirect Operating
Indirect Operating
Frequency of Purchase
Source Center for Advanced Purchasing Study
(NAPM) Circles represent percentages of
transaction volumes
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Effects on the Purchasing
Organization
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The Evolution of the Purchasing Organization
The success of on-line market procurement is
highly contingent upon the strategic
development/revamping of the purchasing
organization
Past
Present
Future

• Focused on transaction processing

• Negotiates with suppliers
• Begins to act strategically
• Purchases one-offs

• Become core of strategic purchasing
• Lead cross-functional teams across business units
• Qualify suppliers and look beyond traditional base

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The Future of the Purchasing Organization
The purchasing organization of the future is
faced with new challenges in managing vendor and
net marketplace partnerships
Challenge
Impact

• Train buyers in auctioning
• Utilize forward auctions to sell
  excess/distressed inventory
• Establish vertical marketplaces
• Create and maintain purchasing consortiums
• Pre-qualify vendors to participate in auctions

• Reduces sourcing and acquisition costs
• Allows purchasing organization to reduce
  inventory holding costs
• Allows for the exchange of items relevant to the
  business
• Leverages purchasing power of peers to shift
  bargaining power
• Minimizes total cost of ownership

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Purchasing at the Lowest Cost
In conjunction with e-purchasing technology, a
sourcing and supply strategy can ensure the
lowest cost possible

• Sourcing and Supply Strategy
• Develop industry expertise
• Target commodities and suppliers
• Benchmark
• Conduct competitive bid process
• Review proposals
• Negotiate agreements
• Select suppliers
• Establish metrics
• Conduct on-going contract performance management
• Drive compliance

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Purchasing at the Lowest Cost
Purchasing organizations need to focus on total
cost factors in order to maximize the
contribution suppliers bring to their businesses
Major Components of Total Cost
Payment Terms
Life Cycle
Pricing
Warranty
Service
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The Cost of Procuring Goods and Services
Once sourcing practices are established and
supplier agreements are finalized, it is
necessary to analyze the procurement transaction
process
Recon. Data Integration
Buying
Paying

• Establishing a baseline cost for the procurement
  process enables companies to...
• Assess which steps are incurring the highest
  costs
• Measure performance and cost savings after a
  process redesign and/or an implementation of
  technology

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The Cost of Procuring Goods and Services
By assessing the procurement process, companies
can understand the magnitude of process costs per
transaction

• Key Initiatives to Realize Savings
• Maintain simple, streamlined processes
• Routinely benchmark performance levels
• Direct employees towards more value-add,
  strategic activities

Financial Management Improvement
People Organizational Improvement
Integrated Purchasing Management
Process Assessment Innovation
Technology Strategies
Performance Assessment Continuous Improvement
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Knowing the Company Culture
Change management is an integral element to the
success of a strategic sourcing program

• What Characterizes Your Company?
• Does a mandating or encouraging culture exist?
• Do employees resist or embrace change?
• Do employees comply with company policies?
• How do employees accept technology?
• What role does e-commerce play in the company
  today?