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Procurement MasterclassProcurement Masterclass

Assessment

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Business Assessment Business Assessment

Most companies aspire to excellence.

• They need to assess current performance.

• Improvement priorities need to be identified.

• Assessment is structured to create a score to identify the current state.

• It is based on a model of overall business performance and processes.

• It sets in place the right culture for teamwork to achieve the company vision, strategy & goals.

• It emphasizes the need for the whole business structure to rest on a platform of high quality data to provide information needed by all.

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Integrated Enterprise Integrated Enterprise PlanningPlanning

Progress in delivering this strategy needs to be reviewed on a monthly basis through a bottom-up re-planning process, which relies for its input on the current status of innovation projects, current Demand Plans in relationships with customers, and the current supply position.

The Delos Partnership call this as a formal Integrated Enterprise Planning process, which is supported by a set of formal linked meetings, as outlined in the following diagram on the left. All companies do some of this in some informal ways; the result is lapses in communication, which end up in fire-fighting and crisis management.

If a monthly formal meeting occurs which reviews each of the elements of the business, which leads to an effective process by which a business can take decisions and implement actions. The key element that supports this process is a fundamental commitment to one set of numbers, for Demand, Supply and Finance, which drives the whole business.

A company that has been effective in developing this process will eventually dispense with the need for the annual budgeting process. These steps are the main activities – sometimes called processes - of a business. If we now look at the key supporting steps of the process, then we can assure ourselves that the overall delivery of the strategy is based on a sound foundation.

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Supply Management Supply Management

• Supply covers both internal & external sources of supply of products & services.

• Internal supply includes internal manufacturing resources and engineering & maintenance services.

• In companies where there is significant product development, supply would include product engineering, scientists and laboratory personnel so that new product development supply information is captured.

• These should be managed in a strategic framework where all resources involved in the demand for existing and new products need to be supported by a planned environment using the tools of Master Scheduling, Material and Capacity Planning, or multi project management, and Vendor Scheduling.

• Creating relationships with Suppliers is crucial to taking cost out of the business, and hence setting up long-term strategic relationships with key suppliers is crucial as part of an effective Procurement Strategy.

• The Integrated Enterprise Planning process provides the long-term visibility needed to support a strategic relationship. This area covers the whole process of maintaining a long-term sustainable Supply Strategy, through to ensuring stability in the short term to maximise effectiveness of the Supply Chain.

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Procurement & SourcingProcurement & Sourcing• Sourcing is included within the Procurement definition

• Companies can generate a huge competitive advantage through establish an effective procurement strategy, and underlying processes to deliver this.

• Procurement should be focussed on delivering a substantial contribution to the bottom line through effective management of the supply base.

• This requires identification of where there are major savings to be made through completing a product, service and supplier classification process and especially managing effective relationships with strategic suppliers, through to developing simplified value creating processes between supplier and customer.

• This should include the development of tools like e-procurement and improved internal processes such as requisition to payment.

• The fundamental basis of the procurement process should be about getting your organisation and your suppliers to work towards the common goal of creating value for your customers, whether this is through design, sales and marketing or logistics processes, and must be based on mutually beneficial co-operation.

• Products and services are classified into Leverage (the majority), Strategic (high value and criticality), Critical (low value but critical) and Nuisance (low criticality and value)

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Assessment MethodologyAssessment Methodology1. The appraisal describes five levels or states of an organisations

development against the above key areas. These levels are then assessed against various dimensions, which describe the process area completely.

2. Attainment in each of the areas can then be assessed into one of five levels. The lowest level, bronze, describes many organisations. One can rate a criteria at zero or half point if the bronze description is not even achieved. This is very rare and it is why most companies start with a silver level.

3. The highest level describes very few organisations.. It is very rare when a company reaches this level in all sections simultaneously, and hence we see that companies should focus on their improvement activities as part of a long-term plan to achieve excellence.

4. The appraisal levels that are shown in this document are broken into five levels. These are:

– Bronze– Silver– Silver-Gilt– Gold– Platinum.

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Assessment MarkingAssessment Marking• Every company will achieve a score and hence can be categorized.

Some checklists suffer from the fact that the lowest level includes many successful companies. When they are told that they are ”failing”, and they do not measure anywhere on “Richter scale”, the people display a negative reaction to the process of measurement, and then do not want to pursue the process. The intent behind this approach is to establish a current level, and then work upwards to improve the effectiveness of the operation.

• The other clear point to make is that a company could be highly successful within their industry currently, and be market leader. However, their performance on this scale might be “only” silver. Nevertheless, it should work on improvement to gold and platinum levels, to prevent other more effective companies entering their market place from other industries. Nokia is a highly successful telecommunications business; however before it was a telecommunications company it was in the paper industry.

• In terms of marking, each question area is given a mark of 1-5 for the level attained. In certain cases one can use half points. Thus if a level of Silver is obtained for the scope of the IEP Process, then 2 marks are given. The set of questions against a category area as above, are added up to provide a mark, and the percentage of the total attainable marks is calculated. The relative positions are then ranked according to the following scale:

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Bronze 0 - 20 %Silver 21 - 40 %Silver Gilt 41 - 60 %Gold 61 - 80 %Platinum 81 -100 %

An overall mark for the organisation is obtained by calculating the total sum of marks obtained as a proportion of total attainable marks.

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Procurement AssessmentProcurement Assessment

PROCUREMENT & SOURCING LEADERSHIP OF THE 6 DIMENSIONS

• We see that any company which has an integrated set of planning tools, a culture of Continuous Improvement, with a clear Strategy and vision, driven by effective operational measures has a substantial opportunity to leverage their collaborative supply chain and achieve a competitive edge.

• Driving the procurement of all externally sourced products and services and implementing integrated electronic processes through a professional team based approach will take 10-20 % out of the cost base of an organisation, and give a strong platform for total value improvement (quality, delivery, innovation, service and competitive edge).

• The Delos Procurement Tools and Techniques based on the six dimensions of procurement are designed to extract the maximum value from the area of Procurement and are crucial to achieving optimum supply side value and benefits.

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Delos Procurement Dimensions Delos Procurement Dimensions

1 Supply & Procurement – Integration & Leadership

2

3

4

Cost, Cash & Spend – Management & Control

Process & Tools – Awareness & Use

Strategic Sourcing – Process & Capability

5 Negotiation & Agreements – Skills & Type

6 Supplier Management – Relationships & Results

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Dimension Bronze Silver Silver Gilt Gold Platinum

Existence There are no formal processes in place for managing the external spend for the company. Orders are placed on suppliers as requirements are identified. It is usual practise to identify three local suppliers for each order, and choose the cheapest.

There is a buying organisation in place, which is separate from the scheduling function, and buyers set up annual contracts with suppliers. 20 % of products are sourced through a vendor schedule, and there are some key supplier relationships in place. Relationships are price driven and there are no agreements in place. The complete spend map is not covered.

A formal Procurement Plan has been developed which has identified the Total Value Plan, and has identified the gaps and opportunities available. The focus is on Purchased Material requirements for Production. Relationships have been established with a number of key suppliers, with whom there are clear objectives driven by SMART goals. E Procurement is being used.

There is a well established Procurement process in place, where most of the suppliers are covered by regularly updated supply and service agreements. and clear joint value delivery partnership have been established. The scope of Procurement has been extended to cover all purchased items throughout the whole of the company. Leverage is achieved through direct negotiations, e-auctions using global sources.

Procurement is a professionally managed area of the business, demonstrably delivering significant benefits to the bottom-line. The six dimensions of procurement are recognised and each is being regularly developed and improved. There is full integration with the Business strategy and other key functions – Finance, IT and Development.

Leadership & PeopleLeadership & People

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Dimension Bronze Silver Silver Gilt Gold Platinum

Scope Purchasing Raw materials for the organisation is covered by the Purchasing Department

Management of most of the products and services are controlled by the Purchasing Department, but there is evidence of some departments still controlling expenditure like Marketing purchasing promotional items, or MD’s secretary arranges travel.

All purchasing of products and services are managed through the procurement function. There is some control of the products and services supplied by the leading suppliers.

All purchasing of internal products and services are managed through the procurement process, and a significant proportion of the raw materials and products and services for key suppliers

Procurement is demonstrably in control of the Supply Chain as it affects the company.

Cost and Cash Spend Management Cost and Cash Spend Management

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Dimension Bronze Silver Silver Gilt Gold Platinum

Processes, Workflow, Tools and Techniques

There is little evidence of any use of analytical procurement tools and techniques or optimised workflow.

Reports are being produced of the Total Spend in the business by supplier, and by category, and this is being used to identify opportunities for specific procurement projects.

A comprehensive Total Value Plan has been produced as a formal plan. There are clear means for measuring the Performance of suppliers through the KPI process. Project Plans are used to drive specific deliverables by key dates. Lean and Agile and Six Sigma techniques are being used internally to drive out cost and waste

Extensive use is made of Lean and Agile techniques with suppliers in order to reduce waste and improve costs. They have been enabled to use effective processes, tools and techniques to reduce their costs.

Value Gap Analysis, Value Stream Mapping, 5 S Housekeeping etc. are all in constant use at suppliers and in your company to drive out waste and improve cost. Transactional costs have been reduced to a minimum through a five step electronic process.

Processes & ToolsProcesses & Tools

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Dimension Bronze Silver Silver Gilt Gold Platinum

Strategic Procurement

There is no real process for managing the procurement process. There is a buying department which is responsible for placing orders, and expediting deliveries. There is no procurement policy.

Buying and Vendor Scheduling have been separated, and schedulers are still engaged in expediting, and buyers are engaged in chasing up suppliers.

There is a professional sourcing management structure in place, clearly managing a comprehensive sourcing process. Products and Services have been classified. There is a Supplier Relationship Management function in place which spends around 50 % of their time with suppliers, actively developing the relationships and improving specifications. Risks have been identified and sourcing is global.

The professional procurement activity extends to all areas of the business, and the Supplier Relationship managers do not do any expediting, and consequently spend 80 % of their time working with their supply base jointly to reduce the cost base through design, their procurement activity, and process development. Global supply sources are delivering RFTQ100% OTIF and global strategic relationships exist. Risks have been minimised and second or third sources can be used.

The Procurement Management system is electronic and contains the four key modules of People, Policies, Processes and Programmes. There is a company-wide culture of Procurement leadership. Procurement and Sourcing have extensive global knowledge and full control over the product and service sourcing strategy. The Procurement forecasting and budgeting process in very sophisticated and an integral part of the business plan.

Strategic Sourcing & DealmakingStrategic Sourcing & Dealmaking

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Dimension Bronze Silver Silver Gilt Gold Platinum

Supplier ManagementAgreements, Relationships, Measurement

Negotiation is about choosing the lowest ex-works cost chosen from a list of three suppliers. Quality and timeliness of delivery not a factor in negotiation. Geographical location of supplier not seen as an issue in choice.

Some relationships with key suppliers have been established but there is no measurement system to capture the value add or value destruction.

The 20 % of suppliers who account for 80 % of the Total Value spend have been established as formal partners with the business, and there are key relationships with suppliers of “C” class parts

All Suppliers are seen as genuine partners in the business, and this has been cemented in the form of formal partnership agreements, driven by a long-term vision and strategy. Suppliers are self planned and certified.

Any supplier will say that they are happy to work with you as a customer and believe that it a highly mutually beneficial relationship. Strategic Suppliers vigorously compete to win the supplier of the year title.

Supplier and Results ManagementSupplier and Results Management

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Procurement Assessment Procurement Assessment BenefitsBenefits• Provides an objective, outside professional view

• Checks that procurement foundations, education, tools and support are in place

• Ensures procurement is customer and business focussed

• Evaluates procurement spend map coverage & cost control

• Assesses sourcing cycle speed and agreement strength

• Assess new innovation and value added opportunities from the supply side

• Provides benchmarks vs. Best in Class & Competitors

• Provides a structured change journey for the team