Optimizing Your Procurement Processes

1
Optimizing Your Procurement Processes
OACUBO Columbus, OH April 26, 2010
2
Dick Strojinc

• Director, Performance Improvement Consulting RSM
  McGladrey, Inc.
• Director of Operations for several private
  businesses
• 25 years experience in supply chain

3
Dale Billet

• Director, Performance Improvement Consulting RSM
  McGladrey, Inc.
• Past President APICS Michiana Chapter
• Director of Materials Management and Director of
  Operations for several private businesses
• APICS Certifications
• Certified Production Inventory Manager (CPIM)
• Certified Integrated Resource Manager (CIRM)
• Certified Supply Chain Professional (CSCP)

4
Agenda

• Obstacles to Optimizing Procurement
• Tools for Improvement
• Action plan
• Procurement Best Practices
• Performance Metrics
• Questions

5
Obstacles to Optimizing Procurement
6
Obstacles to Optimizing Procurement

• Non-salary total spend obstacles
• No one controls total spend
• Difficult to control many diverse areas,
  departments and products / services
• Year to year comparisons are apples and
  oranges
• Silos - Each department head controls their
  budget spend
• Everyone likes to be a purchaser / buyer

7
Obstacles to Optimizing Procurement

• Errors and Delays in the Procurement Process
• Each department must get a PO / approval from
  Purchasing prior to purchase commitment
• Outdated procedures are not being followed
• Purchasing is overloaded
• Written documents are re-written / re-entered to
  create purchase order

8
Obstacles to Optimizing Procurement

• Redundant activities throughout the organization
• Multiple departments purchase the same items /
  services / suppliers independently (travel,
  advertising, etc.)
• Suppliers deliver to each department
• Source selection is performed by each department
• Supplier sales personnel call on each department

9
Obstacles to Optimizing Procurement

• Integrated information system is not fully
  utilized
• Never fully implemented
• Inadequate user training
• Lack of functionality
• Spreadsheets / non-integrated applications being
  used
• Each type of purchase may have a different flow
• Capital
• Large purchases every few years i.e. uniforms,
  equipment
• Office supplies

10
Obstacles to Optimizing Procurement

• Inconsistent procurement practices and procedures
• Personal credit card
• Verbal commitments
• PO number verbally communicated to the vendor
• Cash
• Procurement system is not integrated with budget
  system
• Department head has made commitments not
  documented / known by others

11
Tools for Improvement
12
Tools for Improvement

• Integrated information systems
• Dashboards
• E-procurement functionality
• Supports p-cards
• Electronic approval routing

13
Tools for Improvement (cont.)

• Integrated information systems (cont.)
• Event triggers / alerts / workflow
• Electronic 3-way matching (invoice, PO
  receipt)
• Blanket orders / electronic releases
• Electronic requisitions

14
Tools for Improvement (cont.)

• Supplier Scorecards
• On-time delivery
• Cost reduction
• Quality
• Inventory reduction (more frequent deliveries,
  reduced SKUs, item / service consolidation)
• Value added services

15
Tools for Improvement (cont.)

• ACH (Automated Clearing House) payments
• Buyer groups / consortiums
• Vendor Managed Inventory

16
Action Plan Business Process Improvement
17
Business Process Improvement-Business process
improvement is a systematic methodology to help
an organization make significant advances in the
way its business process operates

• The main objective is to ensure that business
  processes
• Eliminate errors
• Minimize delays
• Maximize the use of assets and human resources
• Are customer friendly
• Are adaptable to changing customer needs
• Provides competitive advantage

18
Principles of BPI

• Focuses on enhancing stakeholder value.
• Concurrently redesigns processes and information
  technology.
• Bridges the "Gap" between As-Is and To-Be.
• Integrates process, people, technology and
  structure.
• Is cross-functional and works across
  organizational / departmental lines.
• Leads to an ongoing education, change management
  and a continuous improvement process.

19
The Impact On The Enterprise

• BPI is a holistic approach to align the
  enterprise with the needs of the customer.
• Customer-driven.
• Identifies required changes
• to the business process,
• management systems,
• human resources and
• culture.

20
The Seven Wastes Of Lean

• Defects
• Overproduction
• Transportation (product)
• Waiting
• Inventory
• Motion (people)
• Processing (extra)

21
BPI Phase Diagram

• Assessment - Benchmark Yourself Against Best
  Practices
• Identify Critical Success Factors
• Identify Key Performance Measures
• BPI Planning - Project Organization
• Business Process Analysis (BPA)
• Target Business Processes for Improvement
• Frame Business Processes
• Document As-Is processes

22
Goals of Business Process Analysis (BPA)

• To answer the following questions
• What are the characteristics of the current
  processes?
• Do the processes support the organization's
  vision?
• What are the strengths and weaknesses of the
  processes?
• How do these processes compare to the
  competition?
• Where and how large are the opportunities for
  improvement?
• How effective is the use of technology in the
  organization?
• What immediate improvement opportunities can be
  implemented?

23
Steps of BPA

• Process Framing
• Process linkage to business strategy
• Assessment of current process performance
• Customer requirements
• Key process indicators
• Time
• Volume
• Costs
• Performance objectives for new process

24
Identify the Value Stream

• Value stream is a sequence of processes from
  beginning to end
• As the value stream is mapped, hopefully most of
  the steps will be found to create value
• Additional steps may be required, but do not add
  value to the product or service (IRS, NCAA, etc.)
• Many steps create no value and can be eliminated

25
Steps of BPA

• Process Framing
• Process identification and scope
• Triggers
• Results
• Stakeholders
• Performers
• Systems
• Level 1 process mapping

26
Steps of BPA

• Process Assessment
• Level 2 process mapping (swim lane diagram)
• Steps
• Performers
• Time
• Volumes
• Disconnects
• Handoffs
• Outcomes

27
BPA Sample Process Map Swim Lanes
28
Steps of BPA

• Process Assessment
• Process variance analysis
• Root cause identification
• Disconnect review
• Cause and effect analysis
• Pareto charts
• Why, Why, Why, Why, Why
• Process flow review
• Improvement suggestions

29
Business Process Redesign

• Purpose
• The purpose of this step is the essence of BPI
  the end result, the new detailed "To-Be" process.

30
Business Process Redesign

• To-Be Process Development
• Process objective identification
• Process goals review
• New process idea generation
• Brainstorm
• Review process improvement suggestions
• Review process assessment
• Challenge assumptions
• Best practice review

31
Business Process Redesign

• To-Be Process Development
• Idea assessment and evaluation
• To-Be process mapping
• To-Be process approval

32
BPI Phases (continued)

• Business Process Redesign
• Implementation Planning
• Define Projects and Teams
• Develop Project Plans
• Executive Management Approval
• Plan Roll-Out / Communication
• Implementation
• Performance Measurement Continuous Improvement

33
Continuous ImprovementThrough Performance
Management
34
Procurement Best Practices
35
Procurement Best PracticesContracting
Leverage all volume suppliers

• Best Practice
• All institution volume is known used for
  negotiations. Supplier base is consolidated to
  build critical mass
• Total purchases from supplier affiliates known
  leveraged in cross-commodity negotiations
• Creative strategies to increase leverage (buying
  groups, combining supplier contracts with other
  commodities)

• Traditional
• Departments purchase for their own needs only
• Departments do not involve rest of the
  university volume in negotiations

36
Procurement Best PracticesNegotiate
Aggressively

• Traditional
• Three written bids, first and final
• Extend existing contracts
• Hammer on price

• Best Practice
• Decompose product/service costs to establish
  target price
• Document negotiations strategy
• Rely on facts to support strategy
• Negotiate aggressively
• Meet face-to-face
• Make no assumptions
• Ask for a lot
• Offer value back
• Use all total cost levers
• Price, terms (payment, warranty, freight),
  technology

37
Procurement Best PracticesEnsure Competition

• Best Practices
• Competition introduced (near-term and long-term)
  for all purchases
• Purchasing selects the supplier
• Fear of competition is a powerful lever

• Traditional
• Quote 3 suppliers
• Same suppliers
• Extensive sole sourcing
• User selects supplier

38
Procurement Best PracticesDevelop Strategic
Suppliers

• Traditional
• Strategic suppliers are Our largest suppliers,
  or Our longest tenure suppliers, or Our JIT
  suppliers, or all suppliers

• Best Practices
• Strategic suppliers are the handful of suppliers
  who can significantly impact our costs because of
  shared goals (collaboration, inventory reduction,
  cost reduction and quality improvement)
• Companies should first identify strategic
  partners and then gradually develop a partnership
  plan

39
Procurement Best PracticesPursue Continuous
Shared Cost Elimination

• Traditional
• Obtain the lowest available cost at contract
  negotiation

• Best Practice
• Obtain the lowest available cost at contract
  negotiation. Commit to shared continuous cost
  elimination during the life of the contract.
• Conduct quarterly measurement meetings
• This approach provides suppliers with continued
  incentive to reduce their prices during the life
  of the contract

40
Procurement Best PracticesVendor Managed
Inventory

• Traditional
• Buyers determine quantities, place purchase
  orders and take ownership of inventory upon
  receiving inventory or when inventory is shipped

• Best Practices
• Vendor assumes planning and replenishment
  responsibility. Vendor owns and manages the
  inventory until used

Buyer is freed up to focus on strategic
sourcing. Inventory is not purchased until used
41
Procurement Best PracticesCreate Rolling
Contracts

• Traditional
• Contract for 3 years renew or re-bid at that
  time for another 3 years

• Best Practices
• Contract for 2 years with strategic partners
• Jointly develop an aggressive rate reduction over
  the life of the contract
• Evaluate the supplier every 3 months award an
  additional 3 months if performing well to a
  maximum of 5 years

Does not allow for supplier complacency Forces
suppliers to constantly work for new business
42
Performance Metrics
43
Performance Metrics

• Cost Savings Ratios
• Difficult when the volume changes composition
  of the category of goods or services changes
• Example Airline travel changes from year-to-year
  (number of flights, destination, number of days
  in advance the tickets are purchased, etc.)
• No good way to do apples to apples comparison
  on total spend
• Instead cents per mile traveled ratio with the
  goal to reduce year-over-year ratio

44
Performance Metrics (cont.)

• Cost Savings Ratios (cont.)
• Office supplies Different market basket of
  products from one year to the next
• Calculate the office spend by employee
• Example 50.00 / employee this year. Goal may be
  to reduce to 47.00 next year

45
QUESTIONS?
46
Contact Information

• Dick Strojinc
• Director, Performance Improvement
• Dale L. Billet, CPIM, CRIM, CSCP
• Director, Performance Improvement
• RSM McGladrey Inc.
• 52700 Independence Court
• P.O. Box 99
• Elkhart, IN 46515-0099
• P 574.296.3780
• www.rsmmcgladrey.com