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The Value-driven procurement organization · 2019. 10. 21. · VALUE-DRIVEN PROCUREMENT Digital...

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1 October 15, 2019 JESSICA HARRIS ELIZABETH ZUCKER VALUE-DRIVEN PROCUREMENT 6 Ways Procurement Creates Value
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  • 1

    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

    [email protected]

    COLLEEN ESTES, SIRIUS SOLUTIONS, 713.299.6618

    MANAGING DIRECTOR – REGULATORY & COMPLIANCE PRACTICE

    [email protected]

    36

    VALUE-DRIVEN PROCUREMENT

    FOR MORE INFORMATION, PLEASE CONTACT:

    mailto:[email protected]:[email protected]

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