Strategic sourcing

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• Strategic sourcing Deloitte best-practices
  approach
• Tomi Šefman
• Head of Management Consulting
• Deloitte d.o.o.
• 17. maj 2007

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The Procurement Process
Procurement consists of cycles of sourcing and
buying transactions, which depend on each other

• Money on the Table
• Identify a need and negotiate and manage
  contracts
• New or better contract creates the opportunity to
  save money

• Money in the Bank
• Items are purchased based on existing contracts

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Strategic Sourcing is a collaborative and
systematic process
The goal is to simultaneously

• Reducing total cost of materials and services for
  an organisation while increasing quality and
  service
• Leveraging internal expenditures while
  rationalising the supply base
• Optimising the internal and external supply chain
  while managing inventory levels on a commodity by
  commodity basis (not one size strategy fits
  all)
• Improving organisational awareness of the Total
  Cost of Ownership while reducing excessive
  levels of requisitioning and complexity
• Building the organisations competitive position
  through continuous improvement and supplier
  added-value

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4
5
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Strategic Sourcing addresses the Total Cost of
products and services that a company procures
Perceived Opportunity
Purchase Price
Demand Drivers
Actual Opportunity
Internal Policies Procedures
Specifications
Procurement Practices
Internal Processes
Inventory Practices
Management Systems
Operational Practices
Retirement Practices
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Sourcing Procurement Value Proposition

• Procurement improvements may offer a less
  disruptive, more effective opportunity to impact
  the bottom line.

Based on the following estimate of costs, as a
percentage of revenue 55 manufacturing
materials services 18 labor 7.5 other
costs Assumes a 20 gross contribution margin
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Significant opportunities have been identified in
most industries

• Enterprises often derive significant savings from
  making small improvements in supplier-facing
  processes and spend management.

Profitability Impact Based on 1-Percent
Reduction in Expenditures Source Gartner -
Supplier Relationship Management Pushes
Profitability in Dealing With Suppliers - 9/02
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Strategic Sourcing delivers greater value than
traditional purchasing approaches

• Category Example of Strategic Sourcing vs.
  Traditional Purchasing

Sources of Savings
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World Class Procurement can be defined using the
following seven dimensions
Supporting material on the progression towards
World Class Procurement can be supplied against
each dimension
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Cross functional teams therefore need to be
employed to maximise benefit
Strategic Sourcing Approach
Traditional Approach
Engineer
CROSS-FUNCTIONALSOURCING TEAM
Engineer
PurchasingAgent
EndUsers


PurchasingAgent
Finance
Marketing
Logistics
Info. Mgmt.
MaterialOfficer
Characterised by
Characterised by

• Functional Responsibilities
• No Common Focus
• Lengthy Cycle Time

• Joint Responsibilities
• Enhanced Communications
• Consistent Supplier Interface
• Short Cycle Time

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The maturity of a procurement organisation can be
defined using the model below

• Strategy fully supports the corporate goals and
  driven by corporate consensus
• Managing the supply risk while leveraging the
  competitive strengths
• Nurturing supplier relationships
• Supplier base share improvement target for cost
  and innovation added value
• Full visibility and trust across the external
  value chain
• Procurement maintains a rationalised supplier
  network that delivers technology, knowledge,
  products or service quality superior to
  competitors

Stage 5 Pioneering
World Class Procurement

• Procurement strategy aligned to corporate
  strategy
• Suppliers selected for strategic fit and deliver
  continuous improvement
• Data driven decision making
• Full support over purchasing cycle
• Risk sharing higher with the organisations
  co-located and jointly financed
• Business planning optimises all commercial
  aspects, tax, investment, people

Stage 4 High Performing
Alliance

• Formal Planning processes
• Focus on Supplier Relationship Management and
  sharing business plans
• Longer term, bigger value contracts with fewer
  suppliers
• Collaboration on cost improvement, increased
  levels of risk sharing
• Trained and qualified resources supporting all
  categories of spend
• Key Performance Indicators in place.

Stage 3 Advancing
Level of Added Value
Partnership
Stage 2 Developing

• - Some category strategy creation, but not
  company wide, and not communicated effectively
• - Volume leverage through effective use of
  competition across categories
• - Track commercial measure of performance,
  targets for savings
• Technology enables i.e. purchase to pay cycle
  improvement through automation
• Selected supplier base consolidation
• Training and recognition of skills required

Purchasing
Stage 1 Reacting
Buying

• Needs not anticipated, data not available or not
  used
• No organisation wide procurement strategy, large
  supplier base
• Transactional focus
• Procurement provides ad-hoc tactical support
• Low skills and resource, little career planning

Time Line 3-5 Years
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Deloitte Consultings six-step methodology
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2
3
4
5
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DiagnoseOpportunity
Assess Internal Supply Chain
AssessSupplyMarket
DevelopSourcingStrategy
Implement Sourcing Strategy
AssessOpportunity
Institutionalise Strategy
Design Program
Key Change Leadership fundamentals are necessary
throughout implementation of the methodology to
ensure successful results

• Develop vision and strategy

• Redesign infrastructure

• Measure performance

• Enroll stakeholders

• Develop new values, skills, and behaviours

• Communicate vision and strategy

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Assessing the Opportunity
Outcomes
Actions

• Team Charter
• Current stakeholders
• Overview of external spending/related costs
• Identification of specific sourcing opportunities
  and issues
• Initial Sourcing Team Communication Plan
• Stakeholder buy-in to program scope and
  opportunities

• Develop team charter
• Identify stakeholders
• Document size of buy
• Document inventory
• Stratify the buy
• Communicate team scope

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The data collected can lead the Strategic
Sourcing Team to identify Quick Hits

• Quick Hits are the Low hanging fruitand can
  provide
• Instant savings to the company
• Credibility to the work of the team
• Building support for further activity

Early on in the process, opportunities may arise
that can be acted upon by the Sourcing Team, or a
separate initiative to capture cost and process
savings right away.
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Assess the Internal Supply Chain
Actions
Outcomes

• Identify demand drivers
• Perform specification review
• Perform specification gap analysis
• Perform specification standardization review
• Perform supplier specification review
• Identify all related Total Cost activities
• Map current process steps
• Evaluate effectiveness of the current process
• Determine Total Cost of Process
• Benchmark Total Cost process
• Identify process opportunities

• List of customer expectations and requirements
• List of current and future internal product and
  service requirements
• List of successful practices being used outside
  the enterprise
• Detailed specifications review
• Initial supplier interfaces that begin supplier
  selection process
• Detailed process map of the internal supply chain
  process
• Total Cost analysis

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When analysing process maps, look for rework,
redundant activities, excessive work process
handoffs and corrective actions as areas for
improvement.
Tips for process mapping

• Mapping Tips
• Always map process as it actually occurs, not as
  it should occur
• Utilise direct observation when possible
• There may be several maps to account for
  variations by location, commodity, etc.
• You will often encounter subprocesses within
  larger processes
• The flowchart should be understandable to
  non-users of the process.

Note Actual process maps are completed in
greater detail.
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Step 3 - Assess the Supply Markets
Actions
Outcomes

• Identify potential sources of supply
• Evaluate industry(ies)
• Identify viable sources of supply
• Perform supplier assessments
• Perform supplier comparisons
• Identify supplier opportunities

• List of successful procurement practices being
  used outside the enterprise
• List of viable suppliers
• Initial supplier assessment and comparative
  analysis
• List best performing suppliers

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Some key tools for supplier market evaluation

• Supplier Value Chain analysis
• Useful for understanding supplier position and
  potential savings levels
• Sources of data include suppliers, public
  financial data, industry reports, etc.

• Five forces model
• Useful for understanding relative bargaining
  power in a category
• Who sets the price you or your supplier?

Potential Entrants
Supplier Value Chain Analysis Example
Distributor Cost Breakdown
Gross Margin 0.14
Industry Competitiveness Intensity of Rivalry
Among Existing Firms
Sales and Marketing 0.19
Suppliers
Customers
Purchase Price 1.22
0
0.50
1.00
1.50
Overhead 0.09
Substitutes
Retail Price 1.64
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Step 4 - Develop Sourcing Strategy
Actions
Outcomes

• Reconfirm scope
• Determine desired outcomes
• Compile opportunities
• Brainstorm process enhancement and supply
  strategies
• Test process strategies and solutions
• Test supply strategies and solutions
• Draft an action plan
• Communicate strategies

• Finalised scope of work statement
• Enhanced internal supply chain process strategy
• Sourcing strategy to meet objectives and desired
  outcomes
• Understanding of how internal stakeholders will
  be impacted
• Management approval of process enhancement and
  supply strategies

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Spectrum of Procurement Strategies
Ease of Implementation
More difficult
Less difficult
Volume Concentration
Demand Management Actions
Best Price Evaluation
Global Sourcing
Product Specification Improvement
Joint Process Improvement
Relationship Restructuring

Consolidation of purchased volume to increase
negotiation leverage (materials and business
units)
Policy changes that reduce demand for the
product/service or substitute lower price
product/service
Expansion of supplier base on a broader,
sometimes international scale
Changing the relative market complexity of an
item through standardiza-tion, substitution or
value engineering
Use of supplier/ customer teams to reengineer key
supplier processes, joint processes and the
supply chain for mutual advantage and cost
reduction
Structuring of long-term supplier/ customer
partnerships or alliances to achieve integrated
new approaches to the business
Disciplined process for aggressively
renegotiating all or selected supplier prices,
contracts and agreements based on competitive
bidding or other techniques
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Methods for defining the sourcing strategy
This sourcing strategy defines both the
commercial relationships with the supply base and
the internal supply management processes
Sourcing Strategy
Supplier strategy Commercial relationship
Supply management process Internal procedures
Leverage
Partner
Centralise execution
Cross Functional
High
High
Buy Market
Manage risk
De- centralise ordering
Simplify
Strategic importance
Strategic importance
Low
Low
Low
High
Low
High
Difficulty of obtaining supply
Complexity of the buy
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Step 5 - Implement Sourcing Strategy
Actions
Outcomes

• Develop supplier solicitation
• strategy
• Implement supplier solicitation strategy
• Conduct supplier negotiation
• Develop process enhancement strategy
• Obtain final approvals
• Award contract

• Selection criteria and weightings for supplier
  selection
• Request for Proposal (RFP) to suppliers
• Short list of suppliers
• Comprehensive evaluation of short-listed
  suppliers
• Performance measure categories for supplier
  performance analysis
• Final selection of supplier(s)
• Finalised Standard Agreement, with negotiated
  pricing and terms
• Communication to all affected stakeholders

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A list of key criteria and associated weights is
required to assess the potential suppliers
The negotiating strategy will help form a list of
key criteria and associated weights to assess the
potential suppliers
Topics Addressed
Weighting Factor
Issues Addressed

• 3rd party certification
• Evaluation of preventative maint.
• Evaluation of quality assurance procedures

Quality
35
Service
20

• Inventory management
• Electronic interface capabilities
• Value-added services

Delivery
15

• Order cycle-time
• Rush order procedures

Cost
30

• Price
• Discounts

Total 100
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Based on market analysis and the supplier
information collected, develop negotiation
tactics for each supplier

• Bottleneck Items
• Strategic inventory
• Focused management
• Move to strategic
• Collaborate

• Strategic Items
• Collaboration/partnership
• Best practice
• Exploit mutual dependency

1 2 3 4 5 6 . . 20
Number of Suppliers

• Non-Critical Items
• Standard products/commodities
• Monitor order volumes
• Spot market

• Leverage Items
• Establish vendor rating criteria
• Competitive bidding

0
50
10
5
of Suppliers Turnover
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Step 6 - Institutionalise Sourcing Strategy
Actions
Outcomes

• Transition to new process
• Develop supplier relationships
• Implement operational changes
• Establish joint supplier/Enterprise process
  improvement team
• Monitor and report savings
• Monitor and report performance

• Implementation of new processes
• Transition to the new supplier(s)
• New supplier relationship(s) focused on jointly
  achieving Total Quality
• Jointly developed process improvement and ongoing
  quality supplier relations
• Measures for internal compliance and track
  benefits

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Sample Stratification Criteria

• Two key criteria determine a Suppliers position
  within the Stratification Market Complexity and
  Strategic Importance.

Stratification Framework
Level 1
Core Partner
Market Complexity (product/service uniqueness,
inflexibility to switch suppliers)
Strategic Partner
Level 2
Level 3
Supplier
Strategic Importanceof Product or Service
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Importance of Team Work
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Wrap-up
1. Think strategically
2. Measure Total Cost
3. Work as a Team
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Contact information
tsefman_at_deloitte.com