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PMAP September 11, 2008
Supplier Management Strategy & Best Practices
Kevin Giblin
September 11, 2008
Crowne Plaza Valley Forge
King of Prussia, PA
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PMAP September 11, 2008
“Inherently, each one of us has the substance within to achieve whatever our goals and dreams define. What is missing from each of us is the training, education, knowledge and insight to utilize what we already have.”
- Mark Twain
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PMAP September 11, 2008
Today’s Objectives
•Discuss trends in supplier management
• Identify best practice supplier management processes to bring value added solutions into your organization
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PMAP September 11, 2008
Business Pressures: How Do We…
Increasing Savings Targets• Drive year-over-year savings
with fewer resources?
• Outperform currency and inflation factors?
Improve Sourcing Execution• Reduce negotiation time and effort?
• Exploit the largest savings opportunities?
• Balance quality, cost and risk?
Drive Sustainable Savings• Leverage supplier knowledge
to improve price performance?
• Enforce negotiated terms?
Maximize Sourcing Influence• Consistently apply policy rules
enterprise-wide?
• Leverage expert sourcing practices across all commodities and divisions?
ProcurementOrganization
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PMAP September 11, 2008
Supplier Management
A formal and structured process by which organizations measure, analyze, and encourage supplier performance to drive continuous improvement.
“You can’t manage what you can’t measure.”
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PMAP September 11, 2008
Trends in Supplier Management
Past Current Future
Clear Procurement Vision and Initiatives
Team Driven
Supplier Integration
Supplier Development
Long Term Agreement
Metrics Development
Quarterly Review
Information Sharing
Inter-Division Synergy
Process Improvement
• Limited Procurement Vision / initiatives
• Large Pool of Vendors
• Random Audit
• Spot Purchases
• No Clear Metrics
• Sporadic Reviews
• Limited information
• Divisional Purchasing
• Little or no process Improvement Program
• World Class Function
• Integrated Commodities
• Supplier Partnerships
• Supplier Synergy
• Robust Metrics
• 360 Reviews
•Early Supplier Involvement
• Corporate Synergy
• BPM/Six Sigma Culture
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PMAP September 11, 2008
Supplier Management Challenges
• Coordinating Procurement activities resources
• Who do we need to focus our efforts on?
• Assessing supplier total cost impact
• What areas require top performance?
• Driving performance improvement
• How can we measure the areas that matter?
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PMAP September 11, 2008
Savings from Supplier Management?
PotentialSupplier Value
Wasted Resources
EfficienciesNot Leveraged
Performance Backsliding
Suppliers Misdirected
UntappedOpportunities
Net SupplierValue
Source: Corporate Executive Board. Driving Supplier Performance Improvement.
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PMAP September 11, 2008
Best Practices
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PMAP September 11, 2008
8-Step Supplier Management Program
1. Supplier Segmentation
2. Category Profiling
3. Organization
4. Governance
5. Supplier Development
6. Performance Management
7. Relationship Management Systems
8. Dynamic Service Level Agreements
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PMAP September 11, 2008
Supplier Segmentation
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PMAP September 11, 2008
What is Segmentation?
• Understanding the landscape of each commodity
• Creating visibility to the suppliers’ level of integration
• Performance measurement tool
• Opportunity to increase compliance
• Supplier rationalization
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PMAP September 11, 2008
Why is this important?
• Absence of process for quantifying how to manage supplier relationships makes it difficult to allocate staff resources accordingly
• Segmentation helps prioritize resources and assign tier-specific performance management
• Efficient performance will increase compliance
• Leverage supplier relationships to drive innovation
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PMAP September 11, 2008
Performance-Weighted Approach
Three dimensions:
1. Filter suppliers based on volume
2. Prioritize suppliers based on performance
3. Determine resource allocation based on value
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PMAP September 11, 2008
The Dimensions of Segmentation
Troubled Healthy
Non-Traditional New
Supplemental
Replaceable
Criticality
Fully Integrated
Critical
Fully IntegratedSupplementalSupplementalFully Integrated
Criticality
By recognizing relationships can shift between four different types of relationships (Healthy,
Troubled, New, and Non-Traditional), segmentation now occurs on a "three-dimensional" chart
that notices similarities between the four categories but as they become more aligned with MHP
both in criticality and cost of ownership, each type of relationship presents both its own
challenges and rewards.
Three-Dimensional Segmentation
SupplementalFully Integrated
Critical
Critical
Total Cost of
Ownership
Replaceable
Replaceable
Total Cost of
Ownership
Replaceable Critical
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PMAP September 11, 2008
Segmenting the Segmentation
Potential Based Chart
66, 80
0, 00, 00
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
Alignment with MGH
Su
pp
lie
r's
Ma
rke
t P
os
itio
n
Multi-Dimensional Chart
0, 00, 0
0, 0
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
Supplier Alignment
Supplier Im
po
rtan
ce
Growth-Focused
0 , 00 , 0
77, 84
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100D rive Growt h
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PMAP September 11, 2008
Tier-Based Approach
Tier 0
Tier 1
Business Impact
Tier 0: Relationships that are critical to customer's long-
term success; Fully integrated activities
Su
pp
lie
r S
pe
nd
Tier 1: Key group of suppliers, difficult to replace;
Integrated involvement in each other's activities
Tier 2 Tier 2: Most common type of relationship; actives
coordinated on a limited basis
Tier 3: Arms-length relationship; easily replaceable
Tier 3
0
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PMAP September 11, 2008
Category Profiling
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PMAP September 11, 2008
Commodity Framework
Sourcing Group:
Commodity Overview:
Sub-commodity/Products:
Market Size in US Dollars:
Major Market Players:
Sourcing Manager:
Key Team Members:
Main User Groups:
MHP Purchasing Vol.:
Number of MHP Suppliers:
Top 5 MHP Suppliers
Total Spend:
Spend with Preferred Supplier:
Spend with Non-Preferred Supplier: EDI:
pCard: pCard:
Current Contract/ Define Requirements: tCard: tCard:
Preferred Supplier: Create RFP: Invoice: AP:
Create Competition: Order Method:
Analyze Suppliers: Approval Method:
Savings from Current Contract: Negotiation:
Contract History: Contract Awarded:
Begin Supplier Mgmt: Payment Method:
Supplier Mgmt Strategy: Required Receipt Acknowledgement?:
eProcurement Priority:
eProcurement Model:
Target eProcurement roll-out:
Spend
Action Plan Dates
Commodity Information Cost Structure Savings Summary
Current Transaction Count
Procure to Pay Statistics
Current State
Share
of Mkt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
Cost Break Down
Service
Capital Cost
Logistics
R&D
Labor
Material
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Am
ount
Pro
jecte
d
Am
ount
Realized
Compliance
Sourcing
Demand
Management
Spend w ith
Preferred
Suppliers
Spend w ith
Non-Preferred
Suppliers
Spend on
pCard
Spend on tCard
AP Spend
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PMAP September 11, 2008
Organization
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PMAP September 11, 2008
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PMAP September 11, 2008
Governance
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PMAP September 11, 2008
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PMAP September 11, 2008
Why is this important?
• Many companies assume outsourcing will provide savings or efficiency
◘ Reality #1: These companies fail to measure internal costs, and cannot measure savings or efficiencies
◘ Reality #2: Nearly 10% of all companies that outsource bring activities back in-house after contract termination !!!
⇒ Procurement can: provide discipline and structure to establish consistent end-to-end outsourcing processes, measure internal TCO, and assess bids to determine savings. Ongoing supplier management adds governance to ensure sustainable value
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PMAP September 11, 2008
Quick Quiz…
• Only 53%* of organizations achieve cost savings from outsourcing because of……?
* Source: Oxford University Survey
Unexpected costs in transition and supplier management
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PMAP September 11, 2008
Outsourcing Risk Assessment
Financial and operational riskIncreased liquidity
Increased oversightAccess to world-class capabilities
Cultural differencesEconomies of scale
Loss of knowledge sharingReduce operating costs
ConfidentialityFocus on core competencies
RisksBenefits
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PMAP September 11, 2008
Building the Culture
• Internal Management Focus Outsource Management Focus
Internal goal setting
Informal communication
Focus on “How”
People management
Focus on “What”
Formal reports and escalations
Service level agreements
Management of complex contracts
Procurement Focus
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PMAP September 11, 2008
…Applying Governance and Structure
How do the suppliers align with our needs?
What do we want to measure the suppliers on?
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PMAP September 11, 2008
Communication of Overall Project Status
•Contracts
•Operational Readiness
•Customer Care
•Order Admin
••HR & Staffing
•Technical Readiness/IT
•Budget Schedule
••Project Schedule
•Comments•Status•Owner•Area
Manage the Effort
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PMAP September 11, 2008
Governance Impact
� Mitigate risks associated with outsourcing by providing visibility into activities
�Reduce sourcing costs by centralizing collective knowledge obtained through RFI, and enabling business units to concentrate on core tasks
�Enable more effective supplier management by giving day-to-day business owners a vehicle to communicate their supplier experience across the organization
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PMAP September 11, 2008
Supplier Development
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PMAP September 11, 2008
Trends in Supplier Collaboration
Company “A” Company “B”
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PMAP September 11, 2008
Supplier Collaboration – Keys to Success
• Partnering with a supplier to understand what could work best for both the company and the supplier.
• Needs to be positioned as a “win win” with the supplier, not a cost cutting exercise.
Assemble
Commodity
Team
Engage
Supplier
Solicit
Supplier
Input
Agree on
InitiativeImplement
• Target current preferred supplier BU stakeholder
• Sourcing Manager
• Supplier Management
• Face to face meeting with key supplier representatives
• Outline the supplier collaboration objectives
• Discuss Best Practices
• Develop key action plans
• Supplier presents initiatives / savings plans
• Evaluate initiatives
• Prioritize initiatives
• Company & Supplier agree on selected project
• Baseline current situation
• Agree on critical success factors and timeline
• Determine measurement factors
• Ongoing team updates
• Track performance to baseline
• Track savings achieved
• Re-engineering of current process
• Communicate
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PMAP September 11, 2008
Supplier Collaboration Initiative Generation Template
Date:
Sourcing Group:
Supplier: Initiative Number
Initiative Description
MGH Benefit
MGH Business Units
Involved
Implementation Timing
Critical Success Factors
Project Responsibility
Project Savings Potential
Savings Methodology
Capital Investment Yes Amount:
Required No
Supplier Benefit
Supplier MGH
Supplier Suggestions
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PMAP September 11, 2008
Supplier Relationship Management Maturity Model
ISM Supplier Management Group
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PMAP September 11, 2008
What is Supplier Relationship Management?
•a comprehensive approach to managing an enterprise's interactions with the organizations that supply the goods and services it uses.
• (searchSAP.com)
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PMAP September 11, 2008
What is the Maturity Model?
Mission
• To develop a maturity model that provides methods for assessing and developing capabilities that enhance an organization’s ability to manage suppliers successfully, consistently, and predictably in order to accomplish the mission of the organization and improve organizational effectiveness.
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PMAP September 11, 2008
SM3
• Strategic Intent of SM3:
• link the supplier management function of an organization with the execution of organization strategy
• describe how capabilities cause measurable outcomes
• an innovation to advance supplier management throughout the industry, because all organizations are not alike and their structures are contingent on varying environments
• identify contingency variables of different types of organizations, and the ways in which the pursuit of maturity differs for each type
• leverage the credibility of primary and secondary research
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PMAP September 11, 2008
Five Major Components Identified
•Spend Visibility
•Supplier Segmentation
•Collaboration
•Performance
•Risk Management
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PMAP September 11, 2008
Levels of Maturity
•Limited or No SRM program existing
•Need Identified to establish SRM program
• Implemented SRM Program
•Utilizing SRM Program
•Leveraging SRM Program (World Class)
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PMAP September 11, 2008
Supplier Capabilities Maturity
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PMAP September 11, 2008
Spend Visibility
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PMAP September 11, 2008
Segmentation
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PMAP September 11, 2008
Collaboration
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PMAP September 11, 2008
Performance
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PMAP September 11, 2008
Risk Management
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PMAP September 11, 2008
Performance Management
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PMAP September 11, 2008
Supplier Collaboration Initiative Evaluation Template
Sourcing Group:
Supplier:
1 2 3 4
Criteria
Max
Score
Initiative
Score
Initiative
Score
Initiative
Score
Initiative
Score
Potential Savings 20 The higher the savings potential the higher the score
Ease of Implementation 20 The easier the idea is to implement the higher the score
Risk to Business Operations 20 The lower the risk to operations the higher the score
Capital Investment Required 10 The lower the capital investment the higher the score
MGH BU Resource Requirement 10 The fewer BU resources needed the higher the score
Timing to Realize Benefit 10 The shorter the time to realize the benefits the higher the score
Level of Innovation 10 The more innovative the idea the higher the score
Total Score 100 0 0 0 0
Implementation Yes
No
Comments
Explanations for No Go Initiatives
MGH Team:
1.
2.3.
4.
Initiative Number
Score Methodology
Supplier Initiative Scorecard
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PMAP September 11, 2008
Relationship Management Systems
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PMAP September 11, 2008
Tools for Managing Suppliers
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PMAP September 11, 2008
Timeline for Implementation
�Step 1: Assess and Prioritize (4-6 Weeks)
Assess supplier management practices and create segmentation approach
�Step 2: Deploy Performance Management (12 Weeks)
Install use of scorecards, launch pilot of performance management tools, establish QBRs
�Step 3: Implement Supplier Management Process
(4 weeks and ongoing thereafter)
Roll out management tools and facilitate change
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PMAP September 11, 2008
Findings
The benefits of using analytics
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PMAP September 11, 2008
Measures of Success
Improve supplier performance by 26% on average
Risk Mitigation
75% of negotiated savings lost within 18 months without effective contract management
Compliance
Supplier development efforts improve prices by 3%
Collaboration and Innovation
Supplier performance management can save 5-15% over a 3 year period
Sourcing and Contracting
KEY FINDINGSMETRIC AREA
Sources: McKinsey Quarterly, PSC, Aberdeen
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PMAP September 11, 2008
Lessons Learned
1. Assess before acting
2. Create cross-functional governance
3. Select suppliers based on present and future capabilities
4. Document transition plans/results to develop internal best practices
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PMAP September 11, 2008
Keys to Supplier Continuous Improvement
Senior Leadership involvement
Data driven discussion and decision
Cross functional team data input
Identify Improvement opportunities and plan
Mutually establish future performance targets
Generate actions and commitments
Measure and reward improved performance
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PMAP September 11, 2008
Discussion
• Questions
• Feedback
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