Strategic Sourcing: Walking the Tightrope in Developing Sourcing Strategy

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This presentation will focus on developing the sourcing strategy as a fundamental and logical process involving the application of tools by skilled, competent, and knowledgeable purchasers. Simply put, our focus will be on the how to in developing a sourcing strategy. Are you experienced? Topics that will be addressed include spend analysis, categorizing the best opportunities for sourcing group profiles, Porters Five Force Model and Sourcing Grids, establishing sourcing group portfolios and supplier portfolios, using the proper RFX format for sourcing, and making strategic sourcing the focal point for supplier negotiations. Participants will view good practice examples of the above. If you find yourself walking the tightrope with a strategic sourcing initiative or an ongoing effort, youll get valuable information in developing your sourcing strategy. With our five phase approach, we will discuss the following how to: 1. Develop sourcing strategies differentiated by expenditure category and based on market dynamics. 2. Deeply involve end-users in sourcing for knowledge and buy-in. 3. Apply a rigorous sourcing approach that examines internal needs against supply market options to find the lowest total cost. 4. Challenge specifications and usage patterns to ensure that each expenditure is providing the best value for the company. 5. Identify, analyze, select, and negotiate with strategically advantaged suppliers, not just the ones with the lowest price today. This presentation will conclude with a presentation review that can refine your understanding of the factors, tools, and guidelines you need to make your sourcing process more effective and more profitable for your organization.

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  • 1. Strategic Sourcing: Walking the Tightrope in Developing Sourcing Strategy forThomas L. Tanel, C.P.M., CTL, CCA, CISCM, President and CEO CATTAN Services Group, Inc., College Station, TX 979-260-7200 www.cattan.com 2010 CATTAN Services Group, Inc.

2. The Agenda Introduction Developing Sourcing Strategy-5 Phases Detailed Five Phase Process Conclusions 3. Strategic SourcingIts Beginnings Systematic strategic sourcing was initiated by General Motors in the 1980s and soon became a common business tool. Many companies worldwide reviewed their purchasing activities and initiated strategic sourcing programs in response to the rise of China as a global manufacturing hub, after its accession to the World Trade Organization in 2001. Also influenced by the Low Cost Country Sourcing push in the last decade. 4. Strategic SourcingDefined Strategic Sourcing is: A focused activity to identify opportunities for cost reduction within the supply chain through volume concentration product specification improvement process improvement relationship restructuring global sourcing and best value evaluation. 5. Develop Sourcing Strategy Five Phase Process 1. 2. 3. 4. 5.Develop sourcing strategies differentiated by expenditure category and based on market dynamics. Deeply involve end-users in sourcing for knowledge and buy-in. Apply a rigorous sourcing approach that examines internal needs against supply market options to find the lowest total cost. Challenge specifications and usage patterns to ensure that each expenditure is providing the best value for the company. Identify, analyze, select, and negotiate with strategically advantaged suppliers, not just the ones with the lowest price today. 6. Strategic Sourcing and Procurement Develop Sourcing Strategy 1. 2. 3. 4. 5.Develop sourcing strategies differentiated by expenditure category and based on market dynamics. Deeply involve end-users in sourcing for knowledge and buy-in. Apply a rigorous sourcing approach that examines internal needs against supply market options to find the lowest total cost. Challenge specifications and usage patterns to ensure that each expenditure is providing the best value for the company. Identify, analyze, select, and negotiate with strategically advantaged suppliers, not just the ones with the lowest price today. 7. Profile Sourcing Group 8. A-B-C Purchasing Classification of Value PercentageABCAnnual Total Purchasing Expenditures/ Buys70-85%10-25%1-20%Annual Total Number of Suppliers5-20%20-30%50-60%Annual Total Number of Services, Products, and Materials10-20%25-30%50-60%Annual Total Number of PO Transactions5-10%15-25%50-70% 9. Categorizing the Best Opportunities for Strategic Sourcing By product line or line of businessIndirect servicesBy sourcing areaLegal Financial Temporary helpBy potential: On-hand inventory investmentCost savingsInventory carrying costsCost avoidanceNo incoming inspectionQuality improvementDays of supply shortenedCycle time reductionSuppliers cost profile reducedJoint benefit 10. Key Spend Categories for ExpertiseAn Example of Sourcing Group Portfolios Information Technology Computer Equipment DASD / Storage Printers PC Workstations Peripherals 3rd Party Maintenance Telecom Equipment Phone Switch Equipment Pagers Cellular Phones Audio & Video Networking Equipment Maintenance Software Development Software Commercial Mainframe ApplicationsFacilities Facilities Management Janitorial Site Maintenance Engineering Security Cafeteria / Vending Utilities Construction Environmental Engineering Services Hazardous W aste Laboratory Real Estate Leases / Rental Furniture Business Equipment Fax MachinesHuman Resources Business Services Education HR Benefits Programs Market Intelligence Consulting Other Personnel Technical SubContract Engineers Programmers Admin Services Secretarial Call Centers Mail Room Reprographics Travel / Entertainment Airlines Hotels Car Rentals Transportation ServicesBusiness Resources MRO / Office Supplies Mill Supplies Electric Supplies Pipes, Valves, Fittings Chemicals Manufacturing Equipment Services Supplies Maintenance Material Handling Equipment Build to Print Non-Product Parts and assembliesMarketing & Communications Marketing Communications Advertising (TV, Radio, Print) Direct Marketing Business / Trade Shows Promotional items Interactive meetings and events Public Relations Sales Promotions Printing Services Pre production Paper Forms / Envelope Printing Commercial Printing Letter shops 11. Categorizing a Sourcing Group PortfolioInformation Technology (IT)Source: Defense Acquisition University 12. Strategic Sourcing and Procurement Develop Sourcing Strategy 1. 2. 3. 4. 5.Develop sourcing strategies differentiated by expenditure category and based on market dynamics. Deeply involve end-users in sourcing for knowledge and buy-in. Apply a rigorous sourcing approach that examines internal needs against supply market options to find the lowest total cost. Challenge specifications and usage patterns to ensure that each expenditure is providing the best value for the company. Identify, analyze, select, and negotiate with strategically advantaged suppliers, not just the ones with the lowest price today. 13. Cross Functional Teams and Teamwork Internal Clients or CustomersOther Stakeholders & Allied FunctionsTeamworkSubject Matter ExpertsPurchasing and Sourcing Team 14. Porters 5 Force Model to Assess Market Complexity GOOD PRACTICE RATIONALEPORTERS 5 FORCESFocus of Strategic AttentionIndustry or BusinessTypes of Competitive AdvantageLow Cost or DifferentiationBasic Unit of Competitive AdvantageActivitiesAccording to Porter, these five forces shape the profitability of an industry and determine how attractive the industry is. 15. Porters Five ForcesApplication Threat of New Entrants (2) Industry is continuously changing and this will bring potential opportunities for new entrants. New entrants need deep pockets and strong strategy Opportunities still exist in Asia-Pacific Most products are web-based, therefore main differentiator will likely be ease of navigation.IT Example1 2 3 4Bargaining Power of Suppliers (3) Some suppliers have unique content which cannot be bought from other sources Continuing to invest money in new tools and in developing content. Some suppliers pursuing a fullservice, one-stop shop model.Industry Competition Rivalry Among Existing Firms (3) Mature industry with a small number of large, powerful suppliers is pushing suppliers to be more responsive with their pricing policies and terms & conditions. Less competition due to industry consolidation, but buyers can still switch suppliers Information aggregators are forming alliances that enable them to provide value-added content analysis such as reputation management and other services5Threat of Substitute Products or Services (2)HighBargaining Power of Buyers (4) Greater awareness of pricing policies putting pressure on suppliers to be more flexible with pricing. Beginning to manage demand and negotiate more effectively. Individual departments within a company can band together to leverage buying power. Opportunities still exist to switch suppliers. Buyers are increasingly able to purchase services tailored to their needs. Increasing availability of information from other sources, e.g. World Wide Web, as search engines such as Google and Yahoo continue to mature and Wikipedia products develop.Source: AT KearneyLow 16. Porters 5 Force Model Grid Sourcing Approaches Based on Spend Volume HighCross Business Unit OverlapCoordinated Sourcing Category 2Collaborative Sourcing Category 4Other Sourcing Options Category 1Site Specific Sourcing Category 3LowHighCategorys Mission Criticality 17. Categorizing a Sourcing Group Portfolio Based on Sourcing Knowledge and User Buy-In Information Technology (IT)Source: Defense Acquisition University 18. Strategic Sourcing and Procurement Develop Sourcing Strategy 1. 2. 3. 4. 5.Develop sourcing strategies differentiated by expenditure category and based on market dynamics. Deeply involve end-users in sourcing for knowledge and buy-in. Apply a rigorous sourcing approach that examines internal needs against supply market options to find the lowest total cost. Challenge specifications and usage patterns to ensure that each expenditure is providing the best value for the company. Identify, analyze, select, and negotiate with strategically advantaged suppliers, not just the ones with the lowest price today. 19. Range of Available Information Commodity Commodity or Service or ServiceMarket or Market or Marketplace MarketplaceDemand/ Demand/ Supply SupplySuppliers or Suppliers or Contractors ContractorsInternational International Implications ImplicationsKey Key Issues IssuesTechnological Technological Issues IssuesKey Cost Key Cost Factors FactorsCapital Capital Investment Investment Plans PlansFinancial Financial Issues IssuesThere is nothing more deceptive There is nothing more deceptive than an obvious factSherlock Holmes than an obvious factSherlock HolmesFuture Future Plans Plans 20. Understand the MarketplaceSteelmaking Industry and the Supply Chain: Example STEELMAKER MODEL HIGH VOLUMESLONG RUNSECONOMIES OF SCALEDistribution, Service and the Supply ChainSMALLER ORDERSADDITIONAL PROCESSINGMARKET MODELINCREASING COMPLEXITY RAPID RESPONSESHORTER LEADTIMES DELIVERY REQSERVICE AND VALUE FLEXIBILITY 21. RFX Formats and Sourcing Factors Conditions Sourcing Factor ConditionsRFIRFQRFB/IFB/IFTRFPDefinable or Available Specifications or RequirementsKnown and UnknownKnown off-the-shelf goods and standard servicesKnown goods and servicesUnknown Detail, providing the What and WhyAvailability of Supplier Capability or Competitive Supplier BaseKnown & Unknown, depends on Preferred or Approved supplier listsKnown, usually Qualified supplier listKnown & Unknown, depends on Preferred or Approved supplier listsKnown, if RFI has been usedUser or Internal Customer CollaborationEncouraged by early Purchasing involvementCompleted, off the shelf goods or standard type servicesUsually completedRequired through early Purchasing interactionLevel of Supplier Collaboration or Commercially AttractiveEncouraged by early supplier or vendor involvementCompleted since it is commercially attractiveCompleted since it is commercially attractiveRequired through supplier and vendor value proposition analysisNeed for Detailed Pricing InformationNo, but standard pricing acceptableYes, based on trade custom/practiceYes, based on your bid/tender guidelinesYes or No, according to RFP formatPotential Savings OpportunitiesLow potentialLow potential, but possibly negotiableIt depends if sealed bid or subject to BAFOVery high depending on spend categoryInherent SourcingLow riskLow to medium riskMedium risk, moreHigh risk 22. Generate Supplier Portfolio AT Kearney View Identify all viable suppliers, even those you have not previously considered By way of example, although the information products industry has seen enormous consolidation, there are still new players entering the industry Ensure your criteria for supplier selection covers all your requirements Dont discard any suppliers at this stage Weighing up all potential suppliers gives you a better idea of the supply market and the competition between the suppliers. 23. Porters 5 Force Model Grid Purchase Category Assessment PositioningCategory Business ImpactLeveraged Purchases Category 2Critical Purchases Category 4Spot Purchases Category 1HighStrategic Purchases Category 3LowHighCategorys Supply Market Complexity 24. Best Value at Lowest Overall CostSource: FedEx 25. Strategic Sourcing and Procurement Develop Sourcing Strategy 1. 2. 3. 4. 5.Develop sourcing strategies differentiated by expenditure category and based on market dynamics. Deeply involve end-users in sourcing for knowledge and buy-in. Apply a rigorous sourcing approach that examines internal needs against supply market options to find the lowest total cost. Challenge specifications and usage patterns to ensure that each expenditure is providing the best value for the company. Identify, analyze, select, and negotiate with strategically advantaged suppliers, not just the ones with the lowest price today. 26. Challenge Specifications Simplification and variety reduction techniques can help in reducing costs and in obtaining better value. Simplification and variety reduction in a specification requires the elimination of complexities in design by omitting different types, sizes, grades etc. of products. At its simplest, this might be seen as: The reduction in the number of colors in which an item is purchased, or In the sizes of envelopes which are purchased and kept in stock For example, many companies have dramatically reduced travel costs by imposing more restrictive travel policies, such as enforcing advanced ticket purchases, mandating economy class on all but the longest flights, and tightening constraints on the use of non-preferred airlines. 27. Challenge Spend Patterns Source: Defense Acquisition UniversityAnother view of spend fragmentation looks at the size of annual spend with suppliers and the implications for our acquisition workload. If we find our annual spend with a large number of suppliers is very low, this could be driving up our cost of acquisition administrative costs. We may want to consider reallocating or consolidating spend 28. Challenge Usage Patterns Companies buy the same or similar products/services from many different suppliers which means: they are not leveraging total company buying power and are managing more suppliers than necessary Companies have not: fully defined product/service requirements or established standard SKUs for many items or service templates for standard-types Companies have not: established formal supplier agreements for a large number of sourcing groups or optimized their sourcing efforts by challenging usage patterns and engaging a reduced supplier base. or forced compliance with preferred suppliers 29. Commodity Purchase Price by SupplierIs Each Expenditure Providing the Best Value Analysis of USMC purchase prices for IT Hardware revealed that USMC contract vehicles offered a selection of vendors for similar products. However, the prices paid for like products varied significantly from one supplier to another. Source: Defense Acquisition UniversityFor example, the highest price paid for a laptop was approximately $2,400, while the lowest price for the same laptop was $1,800; a $600 price difference that revealed an immediate cost savings opportunity. There is also a real opportunity to further reduce this price through subsequent price renegotiation. 30. Strategic Sourcing and Procurement Develop Sourcing Strategy 1. 2. 3. 4. 5.Develop sourcing strategies differentiated by expenditure category and based on market...