strategic sourcing highlights (steps 1 5) · step 1 of the strategic sourcing process is to...

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Strategic Sourcing

Highlights

(Steps 1 – 5)

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What is Strategic Sourcing?

Strategic sourcing is a structured process to source large

recurring spend for the business.

Strategic sourcing is:

• Driven by a rigorous multi-step process

• A collaborative cross-functional team approach

• Driven by fact based analysis and market intelligence

• Focused on the total cost of ownership (TCO),

incorporating customer needs, organizational goals, and

market conditions vs. just price

• Time consuming and can be hard … however worth it!

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Perform sourcing portfolio analysis

Determine sourcing strategy, tactics, and actions

Define negotiations team & roles

Document negotiation strategy

Plan & conduct negotiations

Select supplier(s) for contract award

Conduct spend analysis

Identify opportunities for savings

Develop business case

Develop supplier long list

Develop selection criteria to screen suppliers

Assess supplier list using selection criteria

Develop & issue RFI, if necessary

Develop short-list of suppliers

Create RFx document(s) by category or sub-category

Communicate details to suppliers

Distribute RFx

Evaluate results

Develop short-list of suppliers for negotiations

Finalize & approve new supplier agreement(s)

Develop & execute communication & implementation plan based on impact assessment

Develop supplier performance metrics & tracking process

Determine category benefits tracking approach

Measure supplier performance & category benefits

Establish cross-

functional team

Profile Internally:

Map processes

Analyze detailed item level spend

Develop total cost of ownership (TCO)

Profile Externally:

Perform industry analysis

Develop Porter’s 5 Forces Model

Conduct supplier analysis

AssessOpportunities

Profile Internally & Externally

Develop the Sourcing Strategy

Screen Suppliers & Create Selection Criteria

Conduct Supplier Selection

Negotiate Agreements

Data Collection & Analysis Opportunity Development & Negotiation Implementation

Strategic Sourcing Process

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Implement Agreements & Manage Suppliers

Source: Accenture

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A spend analysis should answer the following questions:

• What did we spend our money on?

• With what suppliers did we do business?

• How did each division and/or geography spend their money?

• Are there opportunities to:

• combine volumes of spending from different businesses,

• standardize product or service requirements,

• reduce the number of suppliers, and/or

• exploit market conditions?

Step 1

Assess Opportunities

Step 1 of the strategic sourcing process is to “Assess Opportunities” which begins with completing a spend analysis.

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A spend analysis can be time consuming and laborious based on the data “cleanliness” and availability, however a critical starting point.

Estimate

Savings

Opportunity

Conduct

Interviews

Collect &

Analyze Data

Step 1 Step 2 Step 3

• Extract spend and

consolidate

• Create common

field descriptions

• Clean and

harmonize the data

• Create category

classifications down

to level 3

• From the spend analysis and interviews, saving opportunities can be identified and benefits estimated

• Conduct interviews with key stakeholders to learn more about the spend and validate the data and opportunities

Step 1


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When the spend analysis is complete, start with the categories where the value is high and implementation easy.

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Ease of Implementation

• Quality of Specs• Time to Qualify Supplier

• Supplier Capability to Implement

• Auction Complexity• Number of Sites• Incumbent Suppliers

• Tooling Issues• Supplier Switching Risk

Benefit Potential• Leverage Potential• Spend • Work Done to Date• Quick Wins / Success

Difficult

Easy

HighLow

Adhesive -Seals-Tape - $6.5Adhesive -Seals-Tape - $6.5

Bearings - $12Bearings - $12

Fittings - $2.5Fittings - $2.5

Castings - $25Castings - $25

Electronics - $65Electronics - $65

Electricals - $60Electricals - $60

Fasteners - $25Fasteners - $25

Belts - $4Belts - $4

Gaskets&Seals - $20Gaskets&Seals - $20

Hardware - $.5Hardware - $.5Labeling&Plates - $10Labeling&Plates - $10

Trim - $45Trim - $45

Grease&Oil - $1.9Grease&Oil - $1.9

Ferrous Raw - $200Ferrous Raw - $200Non-Ferrous Raw - $8Non-Ferrous Raw - $8

Product Finish - $21Product Finish - $21

Chemicals - $22

Plastic Parts - $100Plastic Parts - $100

Wire Forms - $40Wire Forms - $40

Rubber - $14Rubber - $14

Stamping - $38Stamping - $38

Felts&Fabrics - $4Felts&Fabrics - $4

Tubing&Pipe - $8Tubing&Pipe - $8

Valves - $24Valves - $24

Floor Care Bags/Mat. - $14Floor Care Bags/Mat. - $14

Screw Mach. Parts - $5Screw Mach. Parts - $5

Powdered Metal Parts - $1.6Powdered Metal Parts - $1.6

Insulation - $16

Hoses - $10Hoses - $10

Spec. Parts&Acces. $98Spec. Parts&Acces. $98

Purch. Gas Appl. Comp. ^Purch. Gas Appl. Comp. ^

Finished Goods $112Finished Goods $112

Service & Repair $5

Outside Processing $64^

GRP Export - $.9; Filter - $.2GRP Export - $.9; Filter - $.2

Plastic Resins $110Plastic Resins $110

Thermostats - $14

Glass - $37

Packaging $60Packaging $60

= Reverse Auction

= Global Sourcing

= Global Auction

= Strategic Sourcing

= Contract Restricted^ = need more data

Sourcing Strategy

= Reverse Auction

= Global Sourcing

= Global Auction

= Strategic Sourcing

= Contract Restricted^ = need more data

Sourcing Strategy

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2

1

3

Step 1


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Once a category is selected, a cross-functional team is formed to gain input, facilitate communication, and generate buy-in.

– Advantages of Using a CFT –

• Brings insights and experiences to better understand the internal spending patterns and usage (history) as well as the forecast (future), total cost considerations, and decision criteria for potential suppliers

• Trains team members on the strategic sourcing process while providing a more comprehensive view of the company’s operations and processes

• Balances skills and points of view to validate that issues are considered

• Gains buy-in from key stakeholders -across divisions, sites, and functions

• Fosters new ideas and supports the development of opportunities to reduce the Total Cost of Ownership (TCO)

Operations

Engineering

Buyer

IT

Directors

Finance

TeamLeader

InformationSpecialist

Cross Functional Sourcing Team Example

Step 2

Profile Internally and Externally

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Internal Profile

External Profile

Category Profile

Now we thoroughly research the category with the critical purpose of developing the sourcing strategy.

• Detailed Spend

• Processes

• Cost

• Requirements

• Constraints

• Industry Analysis

• Porter’s 5 Forces

• Supplier Analysis

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Step 2

Profile Internally and Externally

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Basic Category Characteristics

Detailed Spend

• By location, business unit, etc.

• By supplier• Seasonality• Addressable • Forecasted

Cost (TCO)

• Cost paid by location• Cost paid by business unit• Cost by supplier/ channel• Cost seasonality• Historical cost• Total system cost

Requirements

• Functional specs• Design specs• Quality specs• Level of customization• Level of standardization• Specification ownership

Constraints

• Self-imposed• Governmental/regulatory• Customer requirements• Current contracts

Creating the internal profile involves researching the category from within (internal to) the organization.

Process

• Standardization review• Supplier evaluation• Performance monitoring

-Quality -Delivery

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Step 2

Profile Internally

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Once the elements are analyzed, we can identify key opportunities to reduce TCO and improve performance.

Negotiate price/Conduct competitive event

• Spot buys occur across geographies, however a global competitive event has never been conducted.

Aggregate volume

• Many co-specs exist for product, aggregating these volumes from truckload to railcars should decrease the unit price.

Consolidate suppliers

• The supply base is highly fragmented –100 suppliers provide product to company, opportunity exists to rationalize the number of suppliers.

Rationalize specs

• Although the material specification may be the same the naming of the specs varies across geographies and Business Units.

Create contracts

• Almost no contracts exist putting company at risk for price increases.

Example High Impact Opportunities

Step 2

Profile Internally

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Composition

Trends

Competition

Supplier Capabilities

• What is the overall size and growth of industry?• What is the industry capacity?• What is global demand? • What is market share by supplier?

• What is the balance of power between industry participants and customers?• What is the nature of competition in this industry?• How big is the industry and who are the major players?

• What are the supplier’s product or service offerings?• What is the supplier’s financials: revenue, operating income, margins, etc.?• What are the supplier’s capacity?• What are the analyst’s comments about the supplier?

• What are the key trends in the industry?• What are the industry leading practices?• Who are the innovative suppliers?• Are there any new and solutions to existing challenges?

External research and analysis provides useful market information to develop the sourcing strategy and negotiation tactics.

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Step 2

Profile Externally

Develop Sourcing Strategy

Internal Profile

• Spend

• Requirements

• Processes

• Total Cost of

Ownership

• Constraints

External Profile

• Competition

• Composition

• Trends

• Supplier Capabilities

• Porter’s Five Forces

• Supplier Analysis

+

Inputs to Develop Sourcing Strategy

Facts and analysis from previous steps are tied together as input for the sourcing strategy.

Opportunity Assessment

• Spend Analysis

• Opportunities

• Scope +

Step 3


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The Sourcing Portfolio Analysis can be used to structure and segment the category/supply base to assist in determining the sourcing strategy.

High

Low

Low High

Bottleneck• Complex specifications

• Few alternative productions / sources

of supply

• New technologies or untested

processes

• Big impact on operations / maintenance

Value Potential

Complexity

/ Risk

Impact

Sourcing Portfolio Analysis

Critical• Critical to profitability and operations

• Few qualified sources of supply

• Large expenditures

• Design and quality critical

• Complex and/or rigid specifications

Leverage• High expenditures, commodity items

• Large marketplace capacity, ample

inventories

• Many alternative products and services

• Many qualified sources of supply• Market / price sensitive

Routine• Many alternative products and services

• Many sources of supply

• Low value; small individual transactions

• Everyday use• Anyone could buy it

Step 3


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Focus, tactics, and potential actions vary by category and influence the sourcing strategy and negotiation tactics.

High

Low

Low High

BottleneckFocus: Supply continuityTactics: Decrease uniqueness, develop new sources, modify specsActions: Direct negotiations, medium term contracts

Value Potential

Complexity

/ Risk

Impact


CriticalFocus: Strategic relationshipsTactics: Supply integration, reduce risks, minimize TCOActions: RFx or direct negotiations, win/win, long term contracts

LeverageFocus: Maximizing commercial advantage $Tactics: Concentrate business, competitionActions: RFx or eActions, short to medium term contracts

RoutineFocus: Simplify the acquisition processTactics: Rationalize supply base, minimize adm. costsActions: RFx or eActions, long-term contracts

Step 3


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Several sourcing approaches can be pursued, either separately or together, based on the category and internal situation.

Best PriceAnalysis

Volume Leveraging

Strategic Relationship

ProcessImprove-ment

DemandManage-ment

CategorySourcingStrategy

STRATEGIC RELATIONSHIP

Establish integrated or close relationships with suppliers where both buyer and supplier work together to share information, collaborate, and further each partner’s goals.

PROCESS IMPROVEMENT

Identify opportunities to standardize and streamline business processes that will result in improved quality, reduced cycle times, and lower TCO.

BEST PRICE ANALYSIS

Evaluate and model costs and use negotiation tactics that increase transparency and maximize competition.

DEMAND MANAGEMENT

Address factors such as standards, requirements, and policies to reduce costs related to internal demand.

VOLUME LEVERAGING

Aggregate like goods and / or services across organizational units in order to increase negotiation leverage and negotiate better pricing, and terms and conditions.

Potential Sourcing Approaches

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Step 3


Each of the sourcing approaches supports a number of objectives with varying degrees of effectiveness.

We can generalize the applicability of various sourcing approaches to the sourcing objectives – actual effectiveness is strongly influenced by

company-specific factors / internal situation16

High Value Medium Value Low Value

Category Positioning

Potential Sourcing

Approaches

Bottleneck Routine Critical Leverage

Best Price Analysis

Demand Management

Volume Leveraging

Process Improvement

Strategic Relationship

Key – Relative Value

Step 3


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1. What type of sourcing event

should we execute?

2. With how many (range) suppliers

should we contract?

3. What should be the contract

length (range)?

4. Should these spend categories

be relationship based or should

they be managed as a

transactional category?

5. What is our area of focus?

High

Low

Low High

Bottleneck

Routine Leverage

Critical

Value Potential

Complexity

/ Risk

Impact


Relationship

Focus

Transaction

Focus

Relationship

Focus

Transaction

Focus

Step 3


You should consider the following questions when developing your sourcing strategy:

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Class Exercise

Open Discussion: Which sourcing strategies and tactics might you

use? Why?

1. Office supplies for your company with numerous transactions, low value

2. Desktop computers for your administrative personnel with high spend and numerous suppliers

3. Custom valve used in production of some your product with 1 supplier and a patented product

4. High cost / high volume electronic components used in production with 2 suppliers

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Throughout the seven step process we continue to build on each step.

Key Outputs

• Supplier Selection Criteria & Weights

• RFI (if necessary)

• Supplier Short List

Key Activities

• Identify long list of suppliers

• Identify relevant selection criteria

• Rank and weight criteria

• Create evaluation scorecard

• Identify supplier short list

Key Inputs

• Category requirements and specifications (Internal Profile)

• External Profile• Sourcing Strategy• Typical category selection criteria

Strategic Sourcing Methodology

Implement Agreements & Manage Suppliers

Negotiate Agreements


Screen Suppliers & Create

Selection Factors


Profile Internally & Externally

Assess Opportunity

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Step 4

Screen Suppliers & Create Selection Factors

Step 4


Brainstorm RFx evaluation criteria important to the specific category and situation then categorize into logical groupings.

Capabilities

Research and Development (R&D) New product development introductions Plant and equipment Capacity (total available for client) Multiple plants Quality system Financials Cost control Sub-suppliers Geographic locations, distance Planning flexibility Scope of product program Logistics integration Innovations (products, processes) Electronic communications

Cooperation / Service

Supplier’s management commitment Quality response Sales service Technical service Administrative service Organization Ethics Partnership

Others

Client’s percentage of supplier revenue Environmental programs Quantity fulfillment Labor stability Currency risk EDI and other communication systems Engineering/factory/scheduling system Transport/packaging quality Warranty/penalties Support for offer process Inspection services Local content

Total Cost of Ownership

Price stability Low-cost purchasing Inventory, JIT

Service

On-time Service response Lead time Cycle time reduction Delivery time/flexibility Bid on time

Quality

Rejections Preventive maintenance Quality-control of sub-suppliers Using ISO-standards

Supply

Market

Insights

Requirements

TCO

Quality program

On time delivery

Capacity available

Management

Product coverage

Sustainability

Labor structure

Geographic

coverage

Selected

Evaluation Criteria

Example

Criteria

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Scoring & Ranking Table Example

The team will then develop a RFx scoring / ranking table to convert the selection factor information to scores and weight the factors.

Step 4


1 3 5

Price 30-50%

Net Delivered Price Highest Middle Lowest

Delivery 15-30%

Lead Times > 3Weeks 2-3 Weeks 1 Week

On-Time Delivery Performance < 75% >= 75% >= 95%

Quality 15-30%

First-Time Quality < 80% >= 80% >= 90%

QS or ISO certified? No Yes

Quality Assessment Score < 80% >= 80% >= 90%

Service 10-30%

Customer Support? None Some Full

Product Development Support? None Some Full

Supplier Diversity 5-10%

Small business / MWBE No N/A

ScoreFactors

Guideline

Weight

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The purpose of the RFx process is to gather additional market intelligence and to score the supplier responses against a pre-determined set of decision criteria.

• Identify and give weight to decision criteria

• Develop calculation model

Selected Suppliers for Negotiations

Selection model

• Complete RFx template

• Issue RFx

Complete RFx

RFx document

Answer Questions

Q&A document

• Internal communication

• External communication

• Receive and analyze responses

• Selection score sum

• Clarification plan ( if needed)

• Determine approach to confirm capabilities

• Measure suppliers against standards and expectations

Identified & executed verification approach

Step 5


Develop RFx Selection

Model

Manage Communication

Review RFx Response

Verify and Analyze

Capabilities

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RFX Process

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Once the supplier responses are received the cross-functional scoring team scores and ranks the suppliers according to pre-established RFx selection criteria.

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List of Suppliers submitting proposal

Ranked List

Name Score1. ABC 872. DEF 863. GHI 81

4. JKL 75...

Short list of suppliers for verification

RFx Selection Model

Name Score1. ABC 872. DEF 863. GHI 814. JKL 75...

1 3 5

Price

Net Delivered Price Highest Middle Lowest

Delivery

Lead Times > 3Weeks 2-3 Weeks 1 Week

On-Time Delivery Performance < 75% >= 75% >= 95%

Quality

First-Time Quality < 80% >= 80% >= 90%

QS or ISO certified? No Yes

Quality Assessment Score < 80% >= 80% >= 90%

Service

Customer Support? None Some Full

Product Development Support? None Some Full

Supplier Diversity

Small business No N/A Yes

Score

Factors

Step 5


Next you should assess the ability of suppliers on the short list to deliver on their claims from their proposals through site visits, reference checks, and/or pilots.

Supplier Verification Approaches

Reference ChecksPros Cons

Small PilotPros Cons

Site VisitsPros Cons

• Get detailed information

• Visualize process• Provides an

opportunity to reduce costs

• Time consuming• Bias/supplier in “sell

make”

• Understand customer perspective

• Faster• Objective

• Won’t get detailed information

• Prove capability • Identify differences• Limit risk• Success builds

organizational momentum

• Does not reflect total scale of initiative

Identify and record:1. Goals of the visit2. Key questions/activities3. Identify supplier contact4. Schedule dates

Identify and record:1. Supplier name2. Contact name3. Date of contact4. Key comments, success, service, timing, etc.

Identify and record:1. Business unit2. Duration of pilot3. Resources (hrs)4. Projected benefits

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Step 5


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With capabilities confirmed, finalize short list of suppliers to proceed to fact based negotiations.

Confirm Capabilities

• Total Cost

• Customer Requirements

• Implementation Approach

• Financial Stability

• Operating Performance

Supplier I Supplier II

Key questions concerning capabilities

Not Capable

Capable

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Short list of suppliers for negotiations

Step 5


Q & A

• Questions?

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strategic sourcing highlights (steps 1 5) · step 1 of the strategic sourcing process is to...

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