Procurement Processes in Automotive Manufacturing

An overview of the SAP Automotive Procurement processes implemented in a

major car manufacturer.

Note: Some of this work was carried out whilst the author was employed by one of the major ERP System Implementers so names and customer detail have been removed to preserve confidentiality.

Kevin Harmon-Smith Feb 2013

AGENDAAGENDA

Topic

Background to Automotive Procurement

SAP Standard Procurement Processes

Summary of Complete Procurement Process implemented and next steps

Background & Principles

Learning from previous automotive experiences

Erptransformations Feb 2013 4

Background to Automotive Procurement

It took many decades for Chief engineers to realise that engineering-driven development approaches were creating very high-cost products that required enormous technical overhead – although we did get some great classic cars back then!Then in the 90s Stallkamp developed a program called SCORE, for Supplier Cost Reduction Effort. The program was announced in 1990 to a group of Chrysler's 150 largest suppliers. Suppliers were asked to submit written proposals that would cut costs. Suppliers had previously submitted such ideas, but found engineering unwilling to take the time or the risk to evaluate them. The carrot was significant: suppliers would receive half the pay-out from verified savings.

Chrysler made SCORE part of its formal supplier rating process, recording total number of ideas and dollars of savings generated. Future business awards were based in part on performance ratings. Suppliers could boost their rating if they kept less than half the award. One major supplier, Magna, gave 100% of its SCORE savings back to Chrysler and more than doubled its sales to the carmaker in the early 1990s.

The real importance of the SCORE approach at Chrysler was not cutting costs on existing programs. It was about creating a different approach to suppliers in new product development. Basically, SCORE was a collaboration technique .

So what are the principles we can gather from the Chrysler experiences


Forming the principles of Automotive

Procurement

There were six major elements of the Extended Enterprise approach at Chrysler.

1. A centralized , fully integrated procurement organization.

2. A focus on long-term relationships with suppliers .

3. Development of procurement strategies through use of cross-functional teams.

4. A comprehensive (not price-focused) approach to costs that included management of material economics as well as SCORE.

5. Supplier development , a concept not well developed by American companies (John Deere was an exception) and ongoing supplier evaluation.

6. The leveraging of supplier resources and technology .

And of course when looking at procurement principles we have to consider “The Honda Way.”


The Honda Way

So how does Honda translate philosophical thinking into concrete action?

From a procurement standpoint, Honda accomplishes the balance between cooperating with suppliers and insuring competitive pricing through the development and application of three organizational capabilities:• Modelling total cost, • Building and sustaining supplier relationships and • Leveraging supplier innovation.

THE THREE REALITIES - also often referred to by the Japanese phrase “SangenShugi,” are actual place, actual part, actual situation. This philosophy means “go to the actual spot” where the action is taking place - such as the supplier’s plant - to address a quality problem. Being in touch with all the realities of the situation contributes to a more complete understanding and better decision making.

THE THREE JOYS philosophy is that each personwho comes in contact with the company — customer, employee or supplier -should enjoy the experience.

All of which need to be measured…..


The KPI’s used to Monitor Supplier Cooperation and

Value

• Total cost savings• Quality• Delivery• Cost avoidance• Implemented cost reduction savings• Procurement Cycle Time• Percentage of suppliers accounting for 80% of the spend• Procurement ROI• Managed spend as percentage of total spend• Contract compliance

The detail of how we do this is the subject of a later deck but what does the Supplier get out of all this monitoring and control?


Supplier Rewards

So the prize for Automotive Suppliers here is:

1. A share of the savings

2. Guaranteed large volume orders

3. Long term orders with long term visibility of demand

4. No competing on price (but absolutely essential to maintain a consistent quality and meet demands.

So how do we shape the standard operational procurement processes to deliver these rewards

SAP Standard Procurement Processes

Building Block Library processes

The answer is that many SAP standard procurement process can deliver these rewards and be easily referenced in the SAP Building Block Library. Only procurement processes specific to automotive procurement are highlighted here all courtesy of SAP AG.

Tendering Award Contract negotiation

Finalise Contract/ready for execution

Finance –Accountspayable

Production /call-off/source of supply


Convert

Plannedorder

Requirements

Dependent requirements

Projects

Reservations

Purchasingfunctions

POsSched. agmt

delivery schedules

Purchaserequisition

Warehouse/stores

Productionorder

Invoice verification

Requirements planning

Demand management

A reminder of where the Requirements come

from: Overall Process Flow

Manual


Automotive Supply to Production Procedures

1. Push

2. Pull


SAP Building Block Library

For many years SAP has provided a comprehensive Building Block Library of Best Practices which are now included in their Rapid Deployment Solutions.

Standard Procurement processes are fully documented by SAP and will not be reproduced here. Only those of specific interest to Automotive Procurement will be referenced in this section.


Scenario Overview: Purchasing with JIT

Delivery Schedules

• This scenario focuses on one option for the purchasing of materials: The purchasing process with delivery schedules.

• This scenario starts with the creation of a vendor contract called scheduling agreement.

• This agreement will be updated, released and transmitted to the supplier.

• After goods receipt the payment invoiced of the items and the transfer to accounting is performed.

JIT Purchasing – a definition:

Purchasing that requires long term agreements with few suppliers

Supplier selection is based not only on price but also delivery schedules, product quality and mutual trust.

Purchase of materials such that delivery is immediate based on demand for use.


Process: Purchasing with JIT Delivery

Schedules


Scenario Overview: Quality Management for

Procurement with Vendor Evaluation

Purpose • This scenario emphasizes the quality inspection activities

required in the automotive procurement process. On goods receipt, an inspection lot is generated according to the defined material specification. A usage decision is then made as to whether to accept or reject the material, based on the inspection result. Subsequent processes such as quality notification and vendor evaluation then follow.

Benefits • Inspection lot creation at goods receipt

Key Process Steps• Quality inspection• Results recording / Usage decision• Defects and returns• Vendor evaluation


Process: Quality Management for Procurement

with Vendor Evaluation

Summary of Complete Process

Text


Summary of Complete Procurement Processes

QuotationQuotation

Purch. Req.”

RFQ” Quotation

PO” GR*^ IR^ AP^

MRP

Projects

Prod. Ord.

Manual

Schedule Agree.”

Del Sched10 100 01/0220 200 04/0230 150 06/02Contracts”

Source List

Quota Arrange.

P.I.R.Vendor Material

Manufacturer Part

AMPL

Service Entry

Service Approval*^”

“ Can be approved* Material Document

Posted^ Accounting Document(s)

Posted

Blanket Order


Departure from SAP Standard

Apart from a few special material types and reports, no horrendous modifications were made to the standard out of the box software. This was the case for the entire Automotive P2P process in the previous slide.

Master Data Management and Material Part Number (MPN) Management did not come without their complications primarily because Master Data was spread across 11 source systems and Suppliers’ master data had to be replicated in the company’s systems.

Monitoring suppliers also did not come without a significant overhead forcing the move to consider a Supplier Evaluation dashboard option.


Dashboards for Monitoring Suppliers


Next Steps

Since this work was undertaken the Ariba SAP integration has been completed and in an effort to reduce internal maintenance activities mentioned above, an exercise was undertaken to evaluate the benefits of moving to the Ariba Marketplace to utilise the Collaborative Sourcing and Spend Visibility Solutions.

If there is a sound business case and award of appropriate funding, then this deck will be updated to reflect the use of the Ariba Marketplace for automotive procurement and the advantages that brings – watch this space!

Collaborative Sourcing • Network Community • Technology • Market Intelligence and Capabilities

About

Aboutt Contact

erptransformations is an independent consultancy run by Kevin Harmon-Smith who is a senior programme manager with a technical twist. With over 30 years’ continuous employment in Industry and Consulting (including the last 13 years with SAP) Kevin has helped companies define and realise value from technology investments.

This experience includes leading the delivery of large-scale multi-million pound programmes, shaping the enterprise architecture of several blue chip organisations, as well as leading teams of up to 40 personnel.

Kevin has also successfully delivered tangible value adding Solution Architecture, Road-mapping and Value Assessment projects across a wide range of Industry sectors.

Over the last three years, Kevin has been managing SAP UK’s Business Transformation Services driving consulting revenue growth by developing services, building the teams and by acting as a "trusted advisor" to FTSE 100 companies.

erptransformations has an extensive network amongst SAP consultants and partners plus across a wide spectrum of the management consultancy sector. This network is often utilised to deliver the optimum service for our customers.

Aboutt Contact

Kevin Harmon-Smith MBA, MSc, PMP, MCMI

T +44 (0)7423 224 785E [email protected]

www.erptransformations.co.uk

Software

Procurement Processes in Automotive Manufacturing