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October 15, 2019
JESSICA HARRIS
ELIZABETH ZUCKER
VALUE-DRIVEN PROCUREMENT
6 Ways Procurement Creates Value
2
INTRODUCTION
VALUE-DRIVEN PROCUREMENT
Traditional Procurement
• Tactical Focus
• Reactive
• Transactional
• Cost Management
• 3 Bids & A Buy
Value-Driven Procurement
• Strategic Focus
• Pro-active
• Relational
• Value Management
• Category Strategy
MATURITY SCALE
Increasing level of effort, skillsets & competencies, stakeholder engagement
and total value delivered
1
3
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
1
4
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
Oversight&
Control
Spend Analytics
Category Management
Governance
Corporate Goals & Objectives
Grow Revenues• Same Store Sales growth• New builds, Retro-fits and re-designs• Demand management• Explore adjacent capabilities
Expand Profit Margins• SGA Expense management• Price reduction• Total Cost approach
Tools Processes Talent
Policies Program Management Balanced Metrics Innovation
Procurement
Tactics
Tie to
Corporate
Strategic
Imperatives
Procurement
Priorities
STRATEGIC ALIGNMENT1
VALUE-DRIVEN PROCUREMENT
1
6
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
Total Cost of Ownership recognizes that purchase price is the “tip of the Iceberg”
TOTAL COST OF OWNERSHIP
Purchase Price
Supplier Quality Program
SpecificationsInventory Practices
Supplier Service Locations
Disposal/Salvage
Waste
Warehousing Costs
Maintenance & Repair
Quality Costs
Financial Condition
Warranty Terms
Freight
Supplier Production/Mfg Capability
Compliance
Support
Consumables
BEST POSSIBLE COST2
VALUE-DRIVEN PROCUREMENT
8
Source: ABB
Engineering costs
• Technical support• Machinery costs
Quality costs
• Rework• Testing • Rescheduling• Loss of profit margin• Additional workmanship
Risk costs
Supplier Mgt. costs
• Project costs• Continual entertainment costs• Travel expenses
Payment costs
• Discounts• Customs• Rebates• Surcharges
Logistics costs
• Freight• Order processing• Delivery methods• Storage handling• Packaging• Waste disposal
Total Cost of
Ownership
BEST POSSIBLE COST2
VALUE-DRIVEN PROCUREMENT
Quoted Price
Example of a
Total Cost of
Ownership
Approach
9
OTHER METHODS FOR ACHIEVING BEST POSSIBLE COST
BEST POSSIBLE COST2
VALUE-DRIVEN PROCUREMENT
Early Involvement
Cost Modeling & Analysis
Alternative Sourcing
Approaches
1
10
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
11
When Procurement provides better visibility, the entire business gains an advantage
Spend
Supply Base
Rules of Engagement
BROADER VISIBILITY3
VALUE-DRIVEN PROCUREMENT
12
TOTAL ADDRESSABLE SPEND VISIBILITY
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
Total Company Spend
Addressable
Direct Categories
Indirect Categories
Non-Addressable
Debt Service
Tax Payments
Salaries
Refunds, Returns
Other Payouts that are not repeatable
13
TOTAL ADDRESSABLE SPEND - BY SPEND CATEGORY
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
0
5
10
15
20
25
30
Addressable Spend ~ $ 130 million
14
SPEND VISIBILITY
SUPPLIER COUNT BY SPEND RANGE
Category Dimensions % of Total
Total category spend $2.407M 27.3%
No. of SKUs 256 25.4%
No. of Suppliers 74 12.6%
No. of Suppliers Contributing to 80% of Spend 9 11.7%
45
20
5 4
$250K
BROADER VISIBILITY2
VALUE-DRIVEN PROCUREMENT
15
SUPPLIER SEGMENTATION TOOL
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
Business
Impact
High
Revenues /
Mark
et
Share
Small• Flexible & responsive
• Local or Regional Only
Diversification of Products / Services
Vulnerable
• Weak financial position• Candidate for acquisition
Specialists• Steep scale and
experience curves
• Niche player
Leaders• Wide product range
• Sound financials
• Global span
16
EXAMPLE: SUPPLIER SEGMENTATION
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
Business
Impact
High
Revenues /
Mark
et
Share
Diversification of Products / Services
Specialists Leaders
Hello$3 b
Ciao$4.5b
Adieu$150m
Adios$1.5bn
Aloha$20m
Czest$16m
Bom Gia$3.5m
Bon Giorno$5m
G’day< $3m
VulnerableSmall
17
EXAMPLE: SUPPLIER PERFORMANCE MANAGEMENT
Cost
Performance
Supply
ReliabilityQuality Financial Relationship
Comments from
Procurement
Low price producer is driving high
savings
Highest # of Backorders
Many quality issues, across many products
Our company is >50% of their
revenuesPositive, innovative
Comments from
Key
Stakeholders
Quality issues may cause higher costs
(even with lower price)
Volume has grown significantly in last 6 months, making
the impact of backorders even
greater
Supplier is not effectively solving
quality issues
Claims some backorders due to
SD slow paying
Cooperative, high energy, willing to
share
Conclusion: Based on the heightened risk, Company needs to re-allocate volumes to qualified suppliers to alleviate risk to supply and cost.
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
?
18
RULES OF ENGAGEMENT
Procurement Engagement
Sourcing Approach
Sourcing Status
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
19
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
• Volume that can be aggregated
(across business units or SKUs)
• Multiple supply options
• Flexible specifications or
requirements
• Easy to competitively bid
• High volume, Low value
• Administration/Low Complexity
• Supply base may not be
managed beyond transactional /
purchasing operations
• Single or sole source
• Old or unique technology
• High supply risk
• May not be brand critical, but
supply risk needs to be managed
• Brand critical items
• Consistent Supply is critical
• Supplier partnerships or longer
term agreements
SUPPLY COMPLEXITY
High
High
Low
Low
SP
EN
D /
VA
LU
E
Leverage Strategic
Routine Bottleneck
INSIGHT TO SOURCING APPROACH
20
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
SUPPLY COMPLEXITY
High
High
Low
Low
SP
EN
D /
VA
LU
E
Leverage Strategic
Routine Bottleneck
Data
Center
Office
Supplies
EMPLOYEE
BENEFITS
PRINTING
Training /
HR
Prof.
Services
Travel /
Relo
Logistics
Taxes
Web Lead
Response
Computer
Peripherals
Marketing &
Advertising
EXAMPLE CATEGORY MATRIX & SOURCING APPROACH
21
BROADER VISIBILITY
VALUE-DRIVEN PROCUREMENT
3
SUPPLY COMPLEXITY
High
High
Low
Low
SP
EN
D /
VA
LU
E
Leverage Strategic
Routine Bottleneck
EXAMPLE CATEGORY MATRIX & SOURCING APPROACH
• Run RFP• Consolidate volumes• Review quality and other
cost influencers• Drive competition
• Re-negotiate• Extend term of contract• Develop joint goals and
objectives
EMPLOYEE
BENEFITS
PRINTING
SOURCING STATUS
RFPs
Spend Analysis Requirements Supply Market Review
RFP Management
Response Evaluation
Negotiation & Selection
Signs
Dir Matls*
Lab Services
FFE
Timeline
10-Dec 17-Dec 24-Dec 31-Dec 7-Jan 14-Jan 21-Jan 28-Jan 4-Feb 11-Feb
Re-negotiations
Supplier 1
Supplier 2
Supplier 3
Intro Re-position Negotiate Contract
Intro Re-position Negotiate Contract
Intro Re-position Negotiate Contract
BROADER VISIBILITY3
VALUE-DRIVEN PROCUREMENT
22
1
23
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
24
A good procurement organization understands that certain supplier relationships need to
be actively managed to maximize value.
Healthy Relationships:
▪ Harness the power of suppliers
▪ Abandon win-at-all costs game
▪ Focus on joint goals and rewards
▪ Look to the long term and focus on
total costs
▪ Allow suppliers a “fair” profit
HEALTHY SUPPLIER RELATIONSHIPS4
VALUE-DRIVEN PROCUREMENT
25
▪ “Adversarial and arms length supplier relationships dating
back to the 1950’s”
▪ 1990 Dr. Ignacio Lopez promoted to director of General
Motors Worldwide Purchasing operations
◦ “I do not want to hear any more that prices are already down
too far and you are making no profits.”
◦ Saved a whopping US $ 1.1 billion in 1991 and US $ 2.4 billion
in 1992
A PROFILE OF GM’S PROCUREMENT PRACTICES
Dr. Ignacio LopezFormer Director General
Motors Worldwide Purchasing Operations
Source: STRATEGIC SOURCING IN THE NEW ECONOMY: HARNESSING THE POTENTIAL OF SOURCING BUSINESS MODELS FOR MODERN PROCUREMENT, Keith, Vitasek Manrodt & Kling, Palgrave 2015
HEALTHY SUPPLIER RELATIONSHIPS
VALUE-DRIVEN PROCUREMENT
4
26
Fallout Is Tangible:
▪ Least favorite big customer
▪ Low marks for key relationship
measures
▪ Suppliers perceive relationship as poor
▪ Higher transaction costs
THE “LOPEZ EFFECT” STILL HAUNTS GM
2014 Reuters report cites GM
Source: Reuters Business News, May 12, 2014
HEALTHY SUPPLIER RELATIONSHIPS
VALUE-DRIVEN PROCUREMENT
4
Value Driven Procurement sees the Power of trust-based Supplier Relationships,
and eschews the old school thinking of “beating supplier up on price”
1
27
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
28
Requirements Gathering
Supplier Qualification
Supply Risk Management
RELIABLE SUPPLY5
VALUE-DRIVEN PROCUREMENT
Procurement assures supply reliability in 3 ways:
WHAT DOES DISASTER LOOK LIKE? DISASTER IS RISK COMING TO REALITY
RELIABLE SUPPLY5
VALUE-DRIVEN PROCUREMENT
30
RELIABLE SUPPLY5
VALUE-DRIVEN PROCUREMENTIm
pa
ct o
n B
usin
ess
Low
Risk
Medium
Risk
Low
Risk
Low
Risk
Medium
Risk
Medium
Risk
Medium
Risk
Medium
Risk
High
Risk
Medium
Risk
High
Risk
High
Risk
Probability
Supply Risk Management
Access
Flexibility
Collaboration
Planning
Step 1. Assess Risk Level Step 2. Structure Risk Management
Risk
Management
Program
1
31
Strategic Alignment
Best Possible Cost
Broader Visibility
Healthy Supplier Relationships
Reliable Supply
Impactful Innovation
2 3
4 5 6
VALUE-DRIVEN PROCUREMENT
6 WAYS PROCUREMENT CREATES VALUE
32
Leveraging technology to become
more automated, proactive and
predictive:
• Source to Pay Technology
• Emerging Digital Capabilities
SUPPLIER ENABLED
INNOVATION
IMPACTFUL INNOVATION6
VALUE-DRIVEN PROCUREMENT
Digital InnovationSupplier Enabled
Innovation
Working with suppliers to foster
innovation:
• Research & Development
• Process Improvement
33
IMPACTFUL INNOVATION6
VALUE-DRIVEN PROCUREMENT
Supplier Enabled Innovation
R&D: Innovation of new products, Improved Speed to Market
Process Improvement- Lowering cost of goods sold, Drive efficiency and quality
BEST PRACTICE IN SUPPLIER ENABLED INNOVATION
• Healthy supplier relationship is key
• Early involvement Design Process
• Encourage Innovative Ideas
• Process Improvement Expertise
• Measure and Recognize Supplier Innovation Performance
DIGITAL SOURCE TO PAY SOME FULL SUITE EXAMPLES:
• Spend Analytics
• e-Sourcing /e-Auction
• e-Catalogs
• Contract Management
• Supplier Portal
• e-Invoicing and Invoice Matching
IMPACTFUL INNOVATION6
VALUE-DRIVEN PROCUREMENT
Digital Innovation
EMERGING DIGITAL CAPABILTIES
• Robotics Process Automation- High volume, repetitive tasks
• AI- Analyzing Unstructured Data to provide additional insight
• OCR/Machine Learning- Read Contracts and Pull Relevant Information
• Predictive Analytics- Predict risk, cost/price fluctuations34
CUSTOM SOLUTIONS. IMPACTFUL RESULTS. SIRSOL.COM
1. EXPECT VALUE BEYOND SAVINGS
2. KNOW WHERE YOU STAND TODAY
3. LEVERAGE EXPERTS TO GET TO THE NEXT LEVEL
35
VALUE-DRIVEN PROCUREMENT
FINAL THOUGHTS
CUSTOM SOLUTIONS. IMPACTFUL RESULTS. SIRSOL.COM
JESSICA HARRIS, SIRIUS SOLUTIONS, 817.313.5073
DIRECTOR – SUPPLY CHAIN PRACTICE
COLLEEN ESTES, SIRIUS SOLUTIONS, 713.299.6618
MANAGING DIRECTOR – REGULATORY & COMPLIANCE PRACTICE
36
VALUE-DRIVEN PROCUREMENT
FOR MORE INFORMATION, PLEASE CONTACT:
mailto:[email protected]:[email protected]