OMSAN LOJİSTİK

Strategic Decisions: Buy or Make

Procurement and Supplier Relationship Management

Latin America Logistics Center

Logistics Management Series

Strategic Decisiions of “Buy or Make”

• Make?• Manufacturing

Competitive Advantage• Intellectual Property• Lack of Finished Goods

Suppliers• Available Infrastructure

• Buy?• Strategic Alliances with

Suppliers• Competitive Advantage in

Marketing and Sales• Free Technologies

Products• Poor Availability of

Infrastructure

Make vs. Buy

• Define:

Q= Number of Units Needed

FH = Fixed Cost to Make

VH = Variable Cost to Make

FC = Fixed Cost to Buy

VC = Variable Cost to Buy

Break-Even is when FM + (VM x Q) = FB + (VB x Q)

Q = ( FM – FB ) / ( VB – VM )

Make vs. Buy

Units per Year (Q)

Total Cost Total Cost to Maketo Make

Total Cost to Total Cost to Buy Buy

Break-even Quantity

FM

FB

To

tal

Co

st (

do

llar

s)

Cost-Volume-Benefit

• For an expected Benefit, the Break-Even is adjusted as follows:

TS = UP x QTS = Total SalesUP = Unit Sales PriceQ = Quantity (Bought or

Manufactured)

TC = FC + VC x QTC = Total CostFC = Fixed CostVC = Variable CostQ = Quantity

Benefit Equations is then:

TB = TS - TC

Replacing and solving, the optimal quantity to buy or manufacture is

Q = ( TB + FC ) / ( UP – VC )

Product Line Economics

A B C TotalVolume (units) 10,000 2,000 2,500 14,500Price per Unit $10 $15 $5 $10Revenues $100,000 $30,000 $12,500 $142,500Var Cost per Unit $5 $5 $3 $4.66Var Cost $50,000 $10,000 $7,500 $67,500Contribution $50,000 $20,000 $5,000 $75,000Fixed Cost $60,000Profit $15,000

Product Line Economics

A B C TotalVolume (units) 10,000 2,000 2,500 14,500Price per Unit $10 $15 $5 $10Revenues $100,000 $30,000 $12,500 $142,500Var Cost per Unit $5 $5 $3 $4.66Var Cost $50,000 $10,000 $7,500 $67,500Contribution $50,000 $20,000 $5,000 $75,000Fixed Cost $20,000 $20,000 $20,000 $60,000Profit $30,000 $0 ($15,000) $15,000

Product Line Economics

A B C TotalVolume (units) 10,000 2,000 0 12,000Price per Unit $10 $15 $0 $11Revenues $100,000 $30,000 $0 $130,000Var Cost per Unit $5 $5 $0 $5.00Var Cost $50,000 $10,000 $0 $60,000Contribution $50,000 $20,000 $0 $70,000Fixed Cost $30,000 $30,000 $0 $60,000Profit $20,000 ($10,000) $0 $10,000

Product Line Economics

A B C TotalVolume (units) 10,000 0 0 10,000Price per Unit $10 $0 $0 $10Revenues $100,000 $0 $0 $100,000Var Cost per Unit $5 $0 $0 $5.00Var Cost $50,000 $0 $0 $50,000Contribution $50,000 $0 $0 $50,000Fixed Cost $60,000 $0 $0 $60,000Profit ($10,000) $0 $0 ($10,000)

Product Line Economics

Price is Only a Small Fraction of the Total Supply Cost

Total

Supply

Cost

Price

Item price

Terms

Tiers

Rebates

Inventory

Carrying cost

Cost of capital

Shrinkage

Logistics

Transportation

Delivery

Warehousing+

Other

Data mgmt

Contract admin

Staff & overhead

Utilization

Customer preference

High-value commodities

Low-value commodities

= + + +

There are Several elements that impact the Total Supply Cost beyond

the Unit Cost!

Uncovering Potential Savings

Acquisition Reception Possession

Utilization Elimination

$$ in CASH

$$ Not CASH

Su

pp

lier

Le

vel

$$ in CASH

$$ Not CASH

Ord

er L

evel

$$ in CASH

$$ Not CASH

Un

it L

evel

Acquisition Reception

Possession Utilization Elimination

$$ in CASH Descuento total sobre la compra

$$ Not CASH Costos de

inspección Costos de

generar RFP Costo de

Administración del contrato

Costo de seguimiento y feed-back

Costo de cambiar de Proveedor

Costos legales por rompimiento de contrato

Costos de ingeniería

Costos de entrenamiento de personal

Costo de Adaptación de los sistemas

Su

pp

lier

Lev

el

Uncovering Potential Savings

Acquisition Reception Possession

Utilization Elimination

$$ in Cash Retraso en el pago (costo-ahorro)

Costos externos de Transporte

$$ Not CASH Costos de ordenar

Costos de recibo

Costo de procesamiento de la factura y del pago

Costo de verificar la cantidad

Costo de verificar la calidad

Costos legales pro problemas de calidad

Costos Internos de Transporte

Costos de control de calidad

Costos de retraso en producción

Costos de recolección de desperdicio

Ord

er L

evel

Uncovering Potential Savings …

Acquisition Reception Possession Utilization Elimination

$$ in CASH Precio Descuentos

Eficiencia intrínseca

Costo de reposición

Costo de reciclaje

Costo de eliminación

$$ Not CASH Costos de instalación y ensamblaje

Costo de prueba del producto

Costo de mantener inventario

Costos de preparar la orden

Costos de falla en producción

Costos de falla en el producto

Costo de mantenimiento

Costo de instalación

Costo de remover materiales obsoletos

Costo de gerenciar la función de eliminación

Un

it L

evel

Uncovering Potential Savings …

In the Intersection between Demand and Supply ‘Focus on the

Buyer”

Distributor

Supplier

Supplier

Supplier

Distributor

Network

Hospitality

OCG

Hospital

Doctor

Clinic

Inte

rnet

or V

PN

Inte

rnet

or V

PN

Comprehensive Data Analysis to Generate 3-Axes Reports:

– WHO: Cost Centers / Departments / Facilities

– WHAT: Expense Categories / commodities

– FROM WHOM: Suppliers / Sellers

Broadlane: Buying Expenses Analysis

“Who buys What From Whom?”

X = WHO

Y = WHAT

Z = FROM WHOM

Expense Analysis helps to determine savings opportunities for future contracts with immediately returns

Detailed Analysis of the Procurement Process

75%

25%

54%

46%

Used Tactics• Better Forecast• Use Evaluation• Education Campaigns• Substitution by Generics

• Point of Use Delivery • Waste and Spillage

Reduction

• Supplier Certification• Less Suppliers• Less SKUs

• Volume Compromises• Group buys• Price Benchmarking

40%

60%

Used Tactics•Just-in-time inventory

•Consignation•Electronic funds transferences

95%

5%

Opportunity of Procurement Costs SavingsIn Hospitals, Produrement Savings might be noticeable. For instance, 5% savings in procurement equals 9% personnel reduction... without firing anybody!

Procurement Strategies

95% of procurement savings come from cost reductions, not better inventory or distribution

95% of procurement savings come from cost reductions, not better inventory or distribution

Most Savings come from better Utilization, not from better Prices

Most Savings come from better Utilization, not from better Prices

LessExpensiveSubstitutes

$2.61 M

LessExpensiveSubstitutes

$2.61 M

WasteElimination

$0.87 M

WasteElimination

$0.87 M

Standardi-zation

$1.25 M

Standardi-zation

$1.25 M

BetterNegotiation

$1.07 M

BetterNegotiation

$1.07 M

Reduction inUtilization

$3.48 M

Reduction inUtilization

$3.48 M

PriceReduction

$2.32 M

PriceReduction

$2.32 M

Total Savings

Oppotunities$6.10 M

Total Savings

Oppotunities$6.10 M

Supply CostReduction

$5.80 M

Supply CostReduction

$5.80 M

Better Logistics

$0.30 M

Better Logistics

$0.30 M

Contract Analysis:Overpayments Report

Date Facility Equipment Supplier Invoiced Price Contracted PriceSavings

IdentifiedPercent Savings

10/26/2000 Facility #1 CT Supplier F $727,274 $635,000 $92,274 12.7%2/22/2001 Facility #2 CT Supplier F $4,106,967 $3,278,937 $828,030 20.2%2/28/2001 Facility #3 CT Supplier F $956,565 $825,000 $131,565 13.8%

$5,790,806 $4,738,937 $1,051,869 18.2%Total:

Original Price: Net price reflected on the original CER submitted.Corrected Price: New net price on corrected CER.Savings Identified: Net IDN savings reflected on corrected CER.

Customer Last Year Spend Projected Spend Savings Percent Savings

IDN $5,790,806 $4,738,937 -$1,051,869 -18.2%

Price Parity Analysis

• Product 210112 – Stryker Handpiece Inter-Pulse• Data shows five different prices paid

PaidPrice

Use/month Total Sales Opportunity

$186.00 57 $11,344 -

$202.74 87 $17,638 $1,456

$292.00 18 $5,256 $1,908

$426.40 5 $1,461 $1,202

$447.20 18 $7,987 $4,701

Opportunity Total = $9,267Opportunity Total = $9,267

Broadlane Average

Time= 112 días

Previous Processing Time = 392 days

71% Reduction

Commodity Start Date Approval Date

Effective Date of the

Contract

Contract Communication

DateImplementation

Date

Total Days for Contracting

Process

Radiology Distribution 3/28/2001 5/15/2001 7/2/2001 9/1/2001 9/5/2001 161Radiopharmaceuticals 4/11/2001 4/13/2001 7/1/2001 7/25/2001 8/1/2001 105Radiology Film 2/5/2001 5/14/2001 5/8/2001 7/25/2001 12/31/2001 170Standard Packs & Drapes 3/9/2001 3/19/2001 4/1/2001 4/16/2001 7/23/2001 38Office Supplies 2/12/2001 4/18/2001 5/1/2001 5/2/2001 5/31/2001 79

Reference Lab Testing 5/21/2001 7/9/2001 8/1/2001 8/14/2001 12/30/2001 85High End Monitoring 4/19/2001 5/14/2001 11/1/2001 12/7/2001 12/17/2001 232Mammography 8/16/2001 9/10/2001 10/1/2001 10/16/2001 10/17/2001 61Barium Products 4/9/2001 4/10/2001 6/1/2001 7/23/2001 8/1/2001 105Electrodes 7/7/2001 7/17/2001 9/1/2001 9/5/2001 10/1/2001 60Low End Monitoring 4/19/2001 5/14/2001 10/1/2001 12/6/2001 12/17/2001 231Surgical Masks 6/1/2001 7/9/2001 9/1/2001 9/22/2001 11/1/2001 113Immunoassay 5/1/2001 8/13/2001 9/1/2001 10/1/2001 10/1/2001 153

Contract Processing Time