Packaging and chemicals case study

Category case study

Woven PP SacksFertilizer and Fertilizer Chemicals

Sugar Processing Chemicals

Dragon Sourcing Your Tailored Approach to Emerging Markets

© 2012 Dragon Sourcing. All rights reserved.2

Agenda

1. Client Overview

2. Transportation & Warehousing Case Study

3. Woven PP Sacks Case Study

4. Fertilizer and Fertilizer Chemicals Case Study

5. Sugar Processing Chemicals Case Study


DS was involved for 2 years in supporting our client for most of the controllable spend categories

Breakdown of Controllable CostsBreakdown of cost of Sales

Categories of Spend that our client is focusing on with the assistance of Dragon Sourcing


Our involvement covered 180 M RMB of spend

Sugar Sacks (BQ) 4,245,000 PiecesSugar Sacks (BH) 1,151,200 PiecesSugar Sacks (BX) 3,380,000 PiecesFertilizer Sacks (BQ) 401,000PiecesFertilizer Sacks (BH) 408,000 Pieces

Transportation 49 Routes N/A 23,980,000 5Warehousing 260 K Tons Capacity N/A 5,180,000 11

Sulfur (BQ)Sulfur (BH)Sulfur (BX)Sulfuric Acid (BQ)Sulfuric Acid (BH)Phosphoric Acid (BQ)Phosphoric Acid (BH)Phosphoric Acid (BX)Lime (BQ) 5,600 TonsLime (BH) 1,734 TonsLime (BX) 3,800 TonsOrganic Fertilizer 15,000 Tons 26,790,000 2Standard Fertilizer 15,000 Tons 27,510,000 2Urea Large (BQ) 3,200 Tons 6,065,000 1Urea Small (BH) 4,200 Tons 7,810,000 2Kalium (BQ) 1,600 TonsKalium (BH) 2,200 TonsCalcium 12% (BQ) 9,400 Tons 6,220,000 2Calcium 15% (BH) 6,500 Tons 5,070,000 2Tung Bran (BH) 5,600 Tons 7,160,000 2

Total= 179,505,660 RMB

Category Subcategory Units Spend (RMB)

Woven PP Sacks 20,486,600 3

Current Supply Base Used

Sugar Processing Chemicals

4,850 Tons 10,670,000 3

1,650 Tons 1,815,000 2

6,569,060 1

Fertilizer & Fertilizer Chemicals

1,100 Tons 6,820,000 2

17,360,000 2


..and resulted in RMB 25 M savings and RMB 90 M in improved cash flow

Negotiation Contractmanagement

Sugar Sacks (BQ) 4,245,000 PiecesSugar Sacks (BH) 1,151,200 PiecesSugar Sacks (BX) 3,380,000 PiecesFertilizer Sacks (BQ) 401,000PiecesFertilizer Sacks (BH) 408,000 Pieces

Transportation 49 Routes N/A 23,980,000 2.18 1.00Warehousing 260 K Tons Capacity N/A 5,180,000 0.14

Sulfur (BQ)Sulfur (BH)Sulfur (BX)Sulfuric Acid (BQ)Sulfuric Acid (BH)Phosphoric Acid (BQ)Phosphoric Acid (BH)Phosphoric Acid (BX)Lime (BQ) 5,600 TonsLime (BH) 1,734 TonsLime (BX) 3,800 TonsOrganic Fertilizer 15,000 Tons 26,790,000 9.66Standard Fertilizer 15,000 Tons 27,510,000 3.30Urea Large (BQ) 3,200 Tons 6,065,000Urea Small (BH) 4,200 Tons 7,810,000Kalium (BQ) 1,600 TonsKalium (BH) 2,200 TonsCalcium 12% (BQ) 9,400 Tons 6,220,000Calcium 15% (BH) 6,500 Tons 5,070,000Tung Bran (BH) 5,600 Tons 7,160,000

1.90 46.80

6.0021.29

0.11

Units Spend (RMB)SubcategoryCategory

Woven PP Sacks 20,486,600 1.05

Fertilizer & FertilizerChemicals

1,100 Tons 6,820,000

Sugar ProcessingChemicals

4,850 Tons 10,670,000

1,650 Tons 1,815,000

17,360,000

Saving (M RMB) Cash FlowImprovement

6,569,060

22.00


Agenda

1. Client Overview






The project scope included 28.2 M RMB, 90% of which on road cargo transportation

Factory Warehouse Port

Warehousing (2.7 M RMB)

Scope included 275 K Ton of warehousing capacity clustered around 4 geographic locations.

Load/unloading (0.2 M RMB)

Price based on Labor cost plus a management fee – service is

provided by warehouse, transportation company or by a

3rd party providing contract labor

Transportation (25.3 M RMB)

Scope included 45 routes, with most of the routes delivering to tone destination and less than

40km


Transportation & Warehousing Supply Base Analysis

Plant 1 & Plant 2 Plant 4Plant 3

# of suppliers 2007/08

10

4 4

6

1 1

3

1 1

0

2

4

6

8

10

12

14

16

18

20

AAA BBB CCCPlant

Num

ber o

f sup

plie

rs

Warehouse Transportation Load & Unload

19

6 6


Transportation & Warehousing Spend Analysis by JV & Supplier

JV #1 (Plant 1 & 2) JV #3 (Plant 4)JV #2 (Plant 3)

2007/08 plant spend vs. supplier

8.8

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

AAA BBB

10.9

5.7

11000

CCC

M R

MB

Supplier 8Supplier 6 Supplier 9Supplier 7

Supplier 1 Supplier 3Supplier 2 Supplier 4 Supplier 5


The No1 destination accounted for 61% of the total spend

Total QTY: 546 k tons Total spend: 25.3M RMB

Destination 1

(12M RMB, 61%)

15%

6%

5%

Destination 1

(12M RMB, 61%)

15%

6%

5%

Destination 1

(224 Ton, 41%)

13%

13%

6%

6%

7%

Destination 1

(224 Ton, 41%)

13%

13%

6%

6%

7%

(17.2 M RMB, 61%)


We found significant price variability for destinations within the same distance range

Price variation analysis

3.0 3.0

8.4

2.2

1.10.9

2.5

0.8 0.8 0.70.9

0.5 0.5 0.5 0.5 0.4 0.5 0.50.3

0.5 0.5 0.5 0.50.9 0.9

0.5 0.5 0.5 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.50.3 0.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Pric

e/To

n/K

m

0km-10km 10km-20km 20km-30km 40km-50km 50km-90km 90km-120km 500km-530km


On warehouses, with the exception of short term storage and non-enclosed storage, the current prices paid by client were aligned around RMB 0.2 / day / ton.

Warehousing & load/unload & transportation

0.00

0.05

0.10

0.15

0.20

0.25

0.30

AAA(10 suppliers)

BBB(4 suppliers)

CCC(4 suppliers)

Type of supplierWarehousing

Warehousing & load/unload

Warehouse Price RMB/day/Ton

0.130.15

0.20 0.20 0.20 0.20 0.2

0.23 0.23 0.23

0.28

0.2 0.2

0.230.24

0.28

0.2 0.2 0.2

0.23

Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8 Supplier 9 Supplier 10 Supplier 11 Supplier 1 Supplier 2 Supplier 3 Supplier 4i Supplier 5 Supplier 1 Supplier 2 Supplier 3 Supplier 4


Hence, the highest leverage we had was to rationalize the supply base in order to extract better pricing conditions

• Client had 10 warehouse suppliers with a total stock capacity of 670 K Ton

• Client was actually using 25 warehouses with no long term contracts, clustered around 4 geographic locations.

• However, the client’s needs were for 275 K Ton of warehousing capacity

• Hence, we focused our strategy on reducing the supplier base in order to achieve better price points and ensure higher quality and consistency of service


On transportation, DS invited a total of 46 suppliers; negotiated with 6 and finally awarded the business to 3

46 suppliers

RFI/RFQ responded

Long list of suppliers

Research to identify potential suppliers RFI/RFQ process Bidding process

40

6

40

6

12

5

RFI/RFQ sent

51

2

Attended the bidding

Selected1

Many potential suppliers were eliminated because of strong

internal resistance to working with new suppliers


For warehousing services, we negotiated with all current suppliers and finally rationalized the supplier base to 3

10 suppliers

RFI/RFQ responded


9

1

RFI/RFQ sent Attended the bidding

Selected

9

1

9

1

9

1

3



At the end of the negotiation, we evaluated 3 different scenarios

Scenarios Pros Cons Benefits $

Choose 3 Suppliers

Consolidated supply base

& large savings

Small risk because of

new supplier

2.18 M RMBSavings

Choose 5 Current Suppliers

Low Risk

No Savings & still

working with some

weak suppliers

540 K RMBSpend

Increase

Stay with Current Situation

No risk No Savings 760 K RMB

Spend Increase

Scenarios Pros Cons Benefits $

Choose 3 Suppliers

Simplified logistics and

inventory management

Small risk to find storage capacity if

production is much higher than forecast

140 K RMBSavings

Choose 5 Current Suppliers

Low Risk

No savings & reduced location choices

53 K RMBSpend

Increase

Stay with Current Situation

No Risk

No Savings & Complex Supplier

Management

270 K RMBSpend

Increase

Transportation Warehousing


Intial Total Spend vs Achieved Total Spend

2.70 2.561.63 1.55

25.3323.15

5.68 4.98

0.03 0.030.20 0.22 0.12 0.13 0.060.05 0.360.380.650.69

10.02

8.77 8.15

10.88

0

5

10

15

20

25

30

Initial Total Spend Achieved Total Spend JV #1(Plant 1&2)Initial Total Spend

JV #1 (Plant 1&2)Achieved Total Spend

JV #2 (Plant 3)Initial Total Spend

JV #2 (Plant #3)Achieved Total Spend

JV #3 (Plant 4)Initial Total Spend

JV #3 (Plant 4)Achieved Total Spend

Spe

nd (M

RM

B)

Load/Unload Warehouse Transportation

Savings of each JV Company

AAA

Savings: 930 K RMB / 7.3 %

BBB

Savings: 560 K RMB / 6.8 %

CCC

Savings: 720 M RMB / 11.8 %

Finally, the client opted for the scenario with highest savings (2.3 M RMB or 8.1%)

28.23 25.23

12.63 11.70 9.51 8.86 6.09 5.37

Transportation Saving2.18 M RMB / 8.6%

Warehouse Saving 0.14 M RMB / 5.1%

Clients Total SavingsSavings: 2.3 M RMB / 8.1 %


Agenda

1. Client Overview






The project scope included 6 SKUs representing 23.2 M RMB in spend

Fertilizer Sack (1.2 M RMB)Project Scope included 2 SKUs of 50 Kg

woven PP Sacks with the 3 color printing on each sack being the factor differentiating

between the SKUs

Sugar Sack (22.0 M RMB)Project Scope included 4 SKUs of 50 Kg woven PP Sacks with the 3 color printing on each sack

being the factor differentiating between the SKUs

PhotoPhoto


Sugar Sack Spend Analysis by type of Sack

Spend Analysis by Category

21.96

1.150.06

0.00

5.00

10.00

15.00

20.00

25.00

White Sugar Sack Fertilizer Sack Red Sugar SackCategory

Spen

d M

RM

B

Average Sack Price 1.95 RMB


Sugar Sack Spend Analysis by Supplier

12.1

5.5

2.41.6 1.7

0

2

4

6

8

10

12

14

QWE RTY UIO PAS DFG

Spen

d in

Mill

ions

RM

B

Supplier Name

Spend Analysis by Supplier


Sugar Sack Spend Analysis by Factory and Supplier

Number ofSuppliers 5 1 15

BBB Factories7. 2

4.2

6.2

5.5


Key Findings of Data Analysis

• The factories were using 7 different Sack SKU’s, 2 Sack are Fertilizer Sack, other 5 Sugar Sacks are distinguished by printing only, but same in other aspects

• 7 Sacks used in the South China Factories– All the sugar sacks used are Identical, except in the printing on the sacks– Fertilizer sacks used have 2 types, laminated & non-laminated– All Sacks use same 3 color printing technology – BBB has 2 factories and was using 5 different Suppliers– AAA and CCC have only one Suppler– “QWE” does not has a consistent price across all factories for the same type of sack

• Some suppliers where not well qualified and did not have their QS Certification


Project Savings Strategy

• Rationalize Supply Base to reduce from 5 to 3 suppliers– Introduce new suppliers to compete for the Business– Increase the volume for winning suppliers

• Reduce Supplier Risk by having winning Suppliers deliver to all Factories– Factories previously having only 1 supplier will have alternatives if a supplier cannot deliver


To challenge the existing suppliers, we introduced new suppliers into the RFI/RFQ process

RFI/RFQ responded


5

1


Selected

9

3

2

15

6

11 suppliers

5 5

45

3 suppliers



Negotiations resulted in savings of 1.5 to 7.6% per plant and a total savings of 1.05M RMB

3.56

1.95

1.79

1.19

0.59

0.84 1.15 1.02

0.78

0.78

0.20

2.95

0.20

2.10

6.21

2.87 5.46

2.53

0.89

0.78

2.97

1.26

1.72

1.52

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

QWE (2006/2007) QWE (2007/2008) RTY (2006/2007) RTY (2007/2008) UIO (2006/2007) UIO (2007/2008) PAS (2006/2007) pas (2007/2008)

Spe

nd (M

RM

B)

Plant & year

Calculations based on 06/07 volumes and negotiated prices vs. 06/07 prices

5.74 5.07

7.22 7.11

4.30 4.20

6.21 5.46

110K RMB Savings (1.5%)

80K RMB Savings (1.9%) 470K RMB Savings (7.6%)

390K RMB Savings (7.2%)


Agenda

1. Client Overview






The project scope included 104 M RMB, with nearly an even split between finished fertilizer and Precursor Chemicals needed to produce Fertilizer

Organic Fertilizer (27.5 M RMB)

1 SKU with a

Demand of 15,000 Tons

Fertilizer Chemicals (49.7 M RMB)

6 SKUs with a total

demand of 330 K Tons of Chemicals

Urea: 2 types 7,600 ton/yr

Kalium: 1 type 3,800 ton/yr

Calcium: 2 types 16,000 ton/yr

Tunbran 1 type 5,600 ton/yr

Compound Fertilizer (26.8 M RMB)

1 SKU with a

Demand of 15,000 Tons

Calicium UreaKalium TunbranFertilizer


Supply base was consolidated from 5 to 3 suppliers

5.5

2.41.6

12.1

1.0

4.2

10.4

7.4

0.5

0.5

2006/07 Supply Base volume 23million RMB

4.8

2.41.6

12.10.6

0.50.5

0

2

4

6

8

10

12

14

H C Y B G

Supplier

RM

B(m

illio

n)

White Sugar Sack Red Sugar Sack Fertilizer Sack

2007/08Supply Base on previous year volume 22 million RMB

4.2

10.4

6.3

1.1

0

2

4

6

8

10

12

14

Cg B QSupplier

RM

B(m

illio

n)

White Sugar Sa Red Sugar Sack Fertilizer Sack


Fertilizer & Fertilizer Chemical Spend Analysis by Supplier

Supplier


Fertilizer & Fertilizer Chemical Spend Analysis by Factory and Supplier

104

20

54

30

08/09 client Fertilizer & Fertilizer Chemical Spend

6.65 6.65

7.81

7.81

6.22

6.22

5.07

5.07

17.36

7.31 10.05

7.16

7.16

27.51

27.51

26.79

26.79

0

20

40

60

80

100

120

BS (08/09) BQ (08/09) BX (08/09) BH (08/09)Plant & year

Spe

nd (M

RM

B)

Big Urea Urea 12%calcium

15% calcium

kalium Tung bran Sugarcane fertilizer Organic feitilizer


Project Savings Strategy

• Rationalize Brand and Supplier Requirements– Replace Specs based on required Brand to Spec based on SKUs Chemical Makeup. – Replace Specs based on required Supplier to Spec based on SKUs Chemical Makeup.

• Rationalize Supply Base to reduce from 8 to 5 suppliers– Change Strategy of buying from Small local traders to buying Directly from Regional Manufactures– Introduce new suppliers to compete for the Business– Increase the volume for wining suppliers

• Reduce Supplier Risk– Qualify new suppliers for single source commodities


SKU Analysis and rationalization of supplier & brand requirements

Urea

Kalium

Calcium 1

Calcium 2

Tunbran

Compound Fertilizer

Organic Fertilizer

Supplier Requirement

Replaced Spec based on Supplier requirement with Spec

based on Chemical Makeup

Brand Requirement

Replaced Spec based on Brand requirement with Spec based on

Chemical Makeup

Increased Competition

Opened Competitive Biding to new suppliers able to produce

Commodity Chemicals to a Chinese Government Standard

driving down the price

Targeted Suppliers that are regional producers instead of

Small traders

Increased Competition

Opened Biding to new suppliers able produce Fertilizer based on Chemical Spec driving down the

price


Here again we introduced new suppliers to challenge the existing ones

RFI/RFQ responded


8

1


Selected

9

3

4

18

11

19 suppliers

8 8

58

5 suppliers



Supply Base was consolidated from 8 to 5 with 1 new supplier

New supplier

Suppliers

2007/2008 fertilizer & fertilizer chemical supplier QTY

1.0 1.0 1.0 1.0 1.0

1.0 1.0

1.0

1.0

1.0 1.0 1.0

1.0

1.0 1.0

1.0 1.0

0.0

1.0

2.0

3.0

4.0

LZ XZ LBNZ H LZ WXJL XZChemical

WAXNSuppliers

2008/2009 fertilizer & fertilizer chemical supplier QTY

1.01.0

1.0

1.0

1.0

1.0

1.0 1.0

0.0

1.0

2.0

3.0

4.0

LZ WX GN XZ LNcalcium urea kalium fertilizer Organic fertilizer


Negotiations resulted in savings of 3.4 to 19.1% per plant and a total savings of 12.6 M RMB

104.4

91.8

21.2 20.2

55.7 45.0

27.6 26.7

12.6M RMB Savings (12.1%) 1.0M RMB Savings (4.7%) 10.7M RMB Savings (19.1%) 0.9M RMB Savings (3.4%)

08/09 Spend vs 08/09 Spend On Negotiate Price

6.66 6.66 6.66 6.66

7.81 7.81

7.81 7.81

5.30 5.30

5.30 5.30

4.68 4.68

4.68 4.68

17.94 15.99

9.20 8.20 8.74 7.79

6.40 6.40

6.40 6.40

27.9024.75

27.90 24.75

27.75

20.25

27.75

20.25

0

20

40

60

80

100

120

client (08/09)Spend

client (08/09)Spend on Negotiate

Price

BQ (08/09)Spend

BQ (08/09)Spend on Negotiate

Price

BX (08/09)Spend

BX(08/09)Spend on Negotiate

Price

BH (08/09)Spend

BH (08/09)Spend on Negotiate

PricePlant & year

Spe

nd (M

RM

B)

Big Urea Urea 12%calcium

15% calcium

kalium Tung bran Sugarcane fertilizer Organic feitilizer


Agenda

1. ClientOverview






The project scope included 4 categories or 25 M RMB in spend.

Lime

(6.56 M RMB)

11,134 Tons of demand with poisonous free test

pass requirement

Sulphuric acid

(1.81 M RMB)

1,650Tons of demand with industry grade

requirement

Phosphoric acid

(6.82 M RMB)

1,100 Tons of demand with Food Grade

requirement

Sulphur

(10.67 M RMB)

4,850 Tons of demand with Food Grade

requirement


Project Scope & Key Findings

Sugar Processing Chemicals Project Scope

• DS entered project in a Monitoring role however DS was forced to take a more active roll when it became clear that the central purchasing staff had made agreements with suppliers to fix prices

• Total spend of the project was 25 M RMB• 4 categories (Sulphur, Sulfuric Acid, Phosphoric Acid, & Lime)

Key findings

• DS has a suspicious that client’ central purchasing staff may have organized price fixing in the bidding process • All plants are extremely resistant to work directly with producers that can offer better prices• Local plant managers prefer to buy commodities from local trader at elevated prices• Brand/Supplier requirements for standard industrial commodities increase the cost to client substantially Ex:

Lime 25% Standard Fertilizer 12%, Organic Fertilizer 52%


Project Strategy & Achievements

Strategy

• Provided price index to central purchasing team• Helped to prepare all the bidding and process documents• Monitored the bidding conference to guarantee transparency• Monitored that contracts are signed in a timely manor

Achievements

• Identified a food-grade sulphur supplier & 4 producers of sugar chemicals• Helped client to save 6 M RMB by blocking the purchase of industry grade sulphur that could not be used

under new Government regulations • After market prices changed drastically in client’s favor DS/Central purchasing team renegotiated with sugar

chemical suppliers to lower spend by an extra ~4M RMB• Extend payment term from 10 days to monthly to improve client cash flow


08/09 BS Sugar Process Chemical Spend vs. Plant

6.82

3.30 1.86 1.66

6.54

3.29

2.231.02

1.27

10.62

5.48

1.640.39

0.893.50

0

5

10

15

20

25

30

BS (08/09) BQ (08/09) BX (08/09) BH (08/09)Plant & year

Spen

d (M

RM

B)

Phosphoric acid Lime Sulphuric acid Sulphur

Total spend on 08/09 Sugar Process chemicals reached 25 M RMB

25.25

12.96

7.59

4.70


….split between the following categories

08/09 BS Sugar Process Chemical Spend vs. Category

5.48

3.30 3.29

0.89

1.64

1.661.02

3.50

0.39

2.231.86

0

2

4

6

8

10

12

Sulphur Phosphoric acid Lime Sulphuric acidCategory

Spen

d (M

RM

B)

BQ (08/09) BH (08/09) BX (08/09)

10.62

6.82 6.54

1.27


08/09 Contract Spend vs. 08/09 Negotiated Spend

08/09 Contract Spend vs 08/09 Nego. Spend

6.824.73

3.30 2.29 1.86 1.29 1.66 1.15

6.54

6.31

3.293.18

2.232.15 1.02 0.98

10.62

8.97

5.48

4.63

3.502.96

1.641.39

1.27

1.27

0.89

0.89

0.390.39

0

5

10

15

20

25

30

BS (08/09)Contract spend

BS (08/09)Nego. spend

BQ (08/09)Contract spend

BQ (08/09)Nego. spend

BX(08/09)Contract spend

BX (08/09)Nego. Spend

BH (08/09)Contract spend

BH (08/09)Nego. Spend

Plant& year

Spen

d (M

RM

B)

Phosphoric acid Lime Sulphur Sulphuric acid

25.25

21.29

12.96 10.98

7.59 6.4 4.7 3.9

3.96 M RMB Savings (15.6%) 1.97 M RMB Savings (15.2%) 1.19 M RMB Savings (15.6%) 0.8 M RMB Savings (16.9%)