Wipro Consulting Services (WCS) · Level-3. Level-4: Level-5. Highly fragmented & Site based...

© 2009 Wipro Ltd - Confidential

Adding Up Beyond Material Costs

Total Cost of Ownership

Presented By: Krishnamani J

Wipro Consulting Services (WCS)Sustainable Global Leadership

© 2009 Wipro Ltd - Confidential2 © 2009 Wipro Ltd - Confidential2

Agenda

3

4 Cost Management First Level (Price Per Unit)

1 Traditional Levers of Cost Management

2 Cost Management Maturity Framework

Spend Analysis

5 Cost Management Second Level (Total Cost of Acquisition)


Agenda

8

9 Total Value Management

6 Cost Management Third Level (Total Cost of Ownership)

7 Opportunities

Going Beyond TCO

10 Supply Chain Interventions

© 2009 Wipro Ltd - Confidential4

Traditional Levers of Cost Management


Traditional Levers of Cost Management

Value Engineering E-sourcing Standardization Process Improvement

Automation Material Cost Reduction

Outsourcing

Logistics

Commercial Restructuring

Suppliers Management

Inventory Management


Cost Management Maturity Framework


Cost Management Maturity FrameworkBest In ClassTraditional

Organization

Technology

Knowledge

Process

Wipro Cost management revolves around comprehensive maturity modelInvolving 4 key levers , that is Organization, Process, Knowledge and Technology.

Level -1 Level-2 Level-3 Level-4 Level-5

Highly fragmented &Site based decisions.

Fragmented purchasing decisions, Some

coordination across sites

Division-based purchasing decisionsSome coordination

across divisions

Region based purchasing decisionsSome company wise

coordination

Centralized or central purchasing decisions

Enterprise wide coordination's

No Standard procedures or metrics

No formal tracking or documentation process

Purchase procedures formalized at the local

levelPerformance measured

at the adhoc basis. Limited Consistency and co-ordination in purchase procedures

Purchase procedures formalized at the

divisional level, Some standard metrics used

by the division

Purchase procedures and metrics ,

standardized the divisional or regional

level

Purchase procedures and metrics

standardized at the enterprise level.

No visibility into the spend, No knowledge of

the supplier markets

Limited visibility into spend, Limited

knowledge of local supply markets.

Visibility into spend category level,

Knowledge of regional supply markets

Visibility into spend at the supplier level

Knowledge of regional supply markets

Visibility into spend at the detailed level

Knowledge of global supply markets

No Automation,Manual processes.

No supplier coordination

Limited automationPhone, fax based

collaboration with supplier

Select processes automated

E-mail or some EDI collaboration

Combination of back office and web based enterprise focused

automation.

Web based enterprise focused automation.Complete sourcing

cycle integrated.


Impact of ineffective TCM

Issues Operational Impact Cost ImplicationsFragmented Procedures Under leveraged Spending

Increased supply and financial riskGreater potential for fraud Lack of preparedness for technology

migration

High purchase price and variance to contracted rates Penalties for missing Minimum Annual

Revenue Commitments (MARCs) with carriers (Telecom industry)

Labour – intensive processes High labour expensesDelays in processing bills Lost bills and manual search for

billing informationOverpayments for billing errors and

duplicate payments

Hidden costs for managers “pushing paper” to approve bills manually Late payment penalties Additional costs to store and archive

bills in paper format or scanning costs

Poor visibility into assets and spending Underutilized assetsNo holistic view of spending Less spend under

contract/management

Unnecessary maintenance contractsDuplicate billing Long sourcing cycles Challenges in determining spending

for specific services

Paper or spread sheet based status and tracking tools

Poor compliance Limited visibility into spending and no

view into category performanceNo automation for flagging contract

expiration

Incomplete record keeping for service disconnects reduces claims collection (Telecom Industry) Ineffective dispute management,

escalation and unresolved claims

Source: Aberdeen


Spend Analysis


Spend AnalysisM

arke

t Com

plex

ity

Resource Criticality

Bottleneck Strategic

LeverageNon - Critical

High

Low

Low High

• ChallengesEssential for operations Few sourcesHigh value and volume

• Key CostsCost of performanceTotal Cost of Ownership

• ChallengesMany options and sources Low valueLow brand preferenceHigh number of transactions

• Key CostsCost of acquisition process

• ChallengesFew sourcesFew sourcing optionsInfrequent transactions

• Key CostsCosts of plant utilizationCost of downtime

• ChallengesMany alternatives and sourcesHigh volumeLarge market capacity

• Key CostsPricing and delivery

Increase Efficiency Reduce Cost


Cost Management First Level (Price Per Unit)


Cost Management : First Level

PPU• Price per unit.

• Measures only the cost paid for each unit.

• Value realized is to the extent of unit cost reduction.

PPU

Unit Cost Optimization

Value Generation

IncreasingCustomer

Value

40%


Case study E-Sourcing : Category – Insurance Premium

Rs 6.0

Rs 2.0

Rs 4.0 66%

Event Summary

Situation• Major FMCG company• Single Lot• 9 Vendors• Pre-bid cost Rs.6.0Mn

Auction Strategy• Modified Rank auction.

Application• DPE Reverse Auction

Result• Savings of Rs.4.0 Mn• 66% below historic price

Rs in Millions


Cost Management Second Level (Total Cost of Acquisition)


Cost Management : Second Level

PPUTCA

PPU

TCA

• Price per unit.

• Measures only the cost paid for each unit.


• Reduction in cost paid per unit.

• Reduction in cost of material acquisition.

PPU


Value Generation Acquistion Cost Optimisation

Level 1 Level 2

IncreasingCustomer

Value

40%

50%


Case Study - eProcurement ImplementationWorld Oil and Gas Major , AustraliaScope: Implementation of Procurement to Pay Automation of BP AMOCO with Wipro’s eProcurement EasySourceSolution

• BP AMOCO has evinced interest in procure to pay process outsourcing. This required a suitable technology platform for the transition and management of processes .

• Wipro proposed implementation of its eProcurementEasySource solution The pilot rollout was intended to evaluate and test the concept and efficacy of a procurement outsourcing implementation.

Challenges

How Wipro helped

Process Automation enabled for the following procurement processes

• Catalog with Item Browser limited to Two categories and all related child items

• Shopping Cart and Check out functionality in the catalog • Creation of Purchase Requisition (customized to

BPAMOCO format) • Approval Workflow of Purchase Requisitions limited to

two levels of hierarchy• Creation of Purchase Orders from Requisitions.

Aggregation of PRs into one PO not included• Uploading of Application data • Maintenance of Application data• Email alerts

• Wipro’s scope of activities included defining the specifications requirements , fit gap assessment to Wipro solution and application customization and setup as per the requirements of BPAMOCO

• Hosting of the application at Wipro hosting infrastructure 24 X 7 support for users over telephone and email Dial In Toll free set up and usage charges would be charged extra at actual. Dial out would be on actual and invoices with supporting documents would

be submitted by Wipro Ltd• Training for users of BPAMOCO and selected vendors User manual would be provided for users Hand holding and knowledge transfer to the users On site support for a month

Key Results


Cost Management Third Level (Total Cost of Ownership)


Cost Management Third Level (Total Cost of Ownership)

PPU

TCA

TCO

PPU

TCA

TCO

PPU

TCA

• Price per unit.• Measures only the

cost paid for each unit.




PPU


Value Generation Acquistion Cost Optimisation

Lower Total costOf ownership

Level 1 Level 2 Level 3

IncreasingCustomer

Value

40%

50%

60%+


Knowing Your Costs - Total Cost of Ownership

Effective Costs

Perceived Costs

Purchase Cost Logistics Cost

Inventory Carrying CostTransactional Cost

Losses and Obsolescence

Stock out and Back orders

Rejection and Rework

Set up Costs

Implementation Cost

Cost of Capital

Direct Labour


Know Your Costs

Transportation

Warehousing

Packaging

Utilization

Inventory

R & D

Capacity

Specification

Data Warehousing

Field Failures

Purchase process Cost

Purchase pricePurchase Cost + Joint Costs + In-House Costs

=

Total Cost of Ownership (TCO)

Vis

ible

Cos

tsH

idde

n C

osts

Visible Costs Vary from Organization to Organizations

All costs of all Components from raw material stage till

they are assembled into final product are considered to

come out with TCO


Know your Costs-TCO Building

30

2010

15 5

155 100

Raw materials Direct labor

Profit and overhead

Packaging/ freight

Example

Inventory Secondary operations

Total cost of

ownership

Focus on controlled cost drivers• Allows cost

reduction without affecting supplier margin

• Facilitates cooperation with supplier

• Demonstrates • cost savings

commitment to suppliers

Purchase price

Joint costs

Warranty

Internal costs

Understand elements of suppliers cost structure

Understand elements of supply chain costs

Understand elements of internal cost


Total cost of

ownership

Purchase Price

In-House Cost

Shared Cost

Main levers

• Purchase Price• Specifications/ Design• Usage Levels

• Internal Handling• Material disposal• Inventory Levels• Non compliance with

contracts

• Consignment inventory• Shipping• Packaging• Returns• R&D• Production variance/

instability- driven costs

Possible actions

• Consolidate suppliers

• Leverage scale• Eliminate middle

market• Standardize, revise

specs

Hold joint workshops with suppliers to identify and reduce

Identify major In-house costs and develop ideas to reduce

TCO approach targets all

elements of cost, not just

purchase price

Reduce Your Costs - TCO Approach


How TCO addresses problems and the TCO Continuum

Landed Cost

Bide or Quote Transport & Tarriffs

Supplier-based TCO

Price & Lifecycle costs

Internal ProcessTCO

Costs of Internal process inefficiencies

Joint process improvement

Internal and Supplier based TCO

Supplier based vs Internal TCO

Outsourcing Analysis TCO

Supply Chain TCO

TCO impact throughout Supply Chain

TCO Continuum

Flaw in Price based system How TCO addresses problems

Comparison made to a previously paid or negotiated price, which may not have been a “good” price

TCO generally compares among alternatives rather than to an absolute, historic price, with a focus on the relevant differences

Single measure like price does not provide true “apples-to-apples” comparison of alternatives

TCO levels the playing field by developing costs for the hidden cost factors and leveling the playing field

Supplier knows that you will try to negotiate ongoing price reductions, so does not give you his “best” offer

The focus is on the “total cost” of the package, so emphasis can shift from price reduction to process improvement to cut total costs for both parties

Price provides a very narrow view of true performance and value Relevant non-price issues and risks are incorporated into the analysis, giving a more holistic view of various options

Assumes that price reduction reflects good performance by purchasers, while price increase is bad

Market prices should still be considered in the analysis, but this more holistic view creates the opportunity for cost reduction even when prices are increasing


Benefits Of TCO ApproachImprovement ideas

• Process rejections

• Inventory costs In-House controlled levers

• Supplier Consolidation / re-sourcing

• Manufacture to specifications

• Reduce rejections

Traditional purchase levers

• Shared process/ product R&D

• Freight and detention costs Mutually controlled levers

Impact on costs

1-3%

0-1%

8-12%

2-4%

1-2%

1-2%

0-1%

TCO approach brings a framework to thread all cost saving initiatives under one umbrella thus helps in organizing efforts to achieve cost leadership

Overall Annual savings of

>15%


0 80 080

40752

0 43 0 24 345013623

342801500

23192613

816

6000

7 0 5 440 15 0 105

75221

0

0

10000

20000

30000

40000

50000

60000

70000

80000

Total 80 40752.1 0 42.72 0 24.4512 0 3450 13622.7 3428 0.40425 1500 2319 2612.8 816 6000 7.35 0 5.4 440 15 0 105 75220.9

Start 0 80 40832.1 40832.1 40874.8 40874.8 40899.2 40899.2 44349.2 57971.9 61399.9 61400.3 62900.3 65219.3 67832.1 68648.1 74648.1 74655.5 74655.5 74660.9 75100.9 75115.9 75115.9 0

Ordering Costs+ Selling

Cost of

BOPs

Freight

BOPCST

Rejection Cost

BOP Inventor

Difference in

Selling

Fabricator

BOPs

Fabricator RM

Fabricator

Consu

Fabricator

Inventor

Welding Cost

Welding &

Contrac

Paint Cost

Processes

Costs

Fabricator

Overhea

Inventory Costs at JCB

Inspection

Costs

Breakages at JCB

Warranty costs at JCB

Infra Costs at JCB

Quality Audit Costs

Tool Amortiz

ation Total

Building TCO

TCO : 75220


Opportunities


0 80 080

70833

0

10000

20000

30000

40000

50000

60000

70000

80000

Total 80 40752.1 0 42.72 0 24.4512 0 2880 11106.7 3428 0 525 2319 2286.2 816 6000 7.35 0 5.4 440 15 0 105 70832.9

Start 0 80 40832.1 40832.1 40874.8 40874.8 40899.2 40899.2 43779.2 54886 58314 58314 58839 61158 63444.2 64260.2 70260.2 70267.5 70267.5 70272.9 70712.9 70727.9 70727.9 0

Ordering Costs+ Selling

Cost of JCB

BOPs

Freight of JCB

BOPCST Rejectio

n Cost

JCB BOP

Inventor

Difference in

Selling

Fabricator

BOPs

Fabricator RM

Fabricator

Consu

Fabricator

Inventor

Welding Costs

Welding &

Contrac

Paint Cost

Processes

Costs

Fabricator

Overhea

Inventory Costs at JCB

Inspection

Costs

Breakages at JCB

Warranty costs at JCB

Infra Costs at JCB

Quality Audit Costs

Tool Amortiz

ation Total

Opportunities :

Strategic Sourcing

Yield / Material Substitution

Process Improvement

Direct Sourcing


Case Study – Inventory OptimizationThe ClientA leading transnational consumer and cosmetics products group

One niggling problem faced by the company was the 23 plants and 3000 MRO items per plant

Poor visibility of MRO items across plants due to non- standardized codification system

Difficult to aggregate components Difficult to optimally utilize inventory

Challenges

Key Results

Phase-1

• Studied existing code logic• Designed common uniform 8 digit code across

plants• Mapped Engg. Codes of 23 plants to new codes

and identified common items• Suggested types of MIS that can be evolved from

new codes.

Phase-2

• Conducted spend Analysis after codification and helped them optimize their inventory

• consolidate their buying to leverage along with reduction in inventory

Reduction in duplication of codes - more than 14% items across plants; Nearly 1-2% duplication in the same plant

Reduction in inventory & Identified Saving of > 15%

How Wipro helped


Going Beyond TCO


PPU

TCA

TCO

PPU

TCA

TCO

PPU

TCA

• Price per unit.• Measures only the

cost paid for each unit.




• Reduction in acquisition cost.

• Reduction in Usage costs.

• Reduction in supplier management cost.

PPU


Value GenerationAcquistion Cost Optimisation

Lower Total costOf ownership

Level 1 Level 2 Level 3

IncreasingCustomer

Value

40%

50%

60%+

TVM

TCO

TCA

PPU

TVM

Level 4

• Reduction in TCO.• Aligning supply

management to corporate goals & objectives.

Going Beyond TCO


Total Value Management


Total Value Management Approach

Spend Analysis

DataCollection

ElectronicSourcing

OnlineNegotiations

DecisionOptimization

ContractAward

ContractManagement

TVM

Total Cost Total Value


Approach

…….focusing on value realized to the cost incurred.

PPU TCA TCO TVM

Data Collection

Spend Analysis

Electronic Sourcing

E Negotiations

Decision Optimization

Contract Award

Contract Management


Decision Optimization

ContractAward

Award Decision

• Innovation Capability.

• Sourcing Cycle time.

• Delivery Flexibility

• Time to Market

• Forecasting

• Demand Triggers

• Demand variance

• Customer satisfaction

• Alternate Products

• Potential improvement targets

• Cost savings

Suppliers

Market

Opportunities


Supply Chain Interventions


Supply Chain Interventions : Contract Management

Overall sourcing strategy

Local and minority spend parameters

Spend AnalysisDevelop savings and budget Targets

Develop Sourcing Plan

Approve sourcing plan or Category supply strategy

Issue RFx, Conduct reverse auction

Select Supplier

Approve certain large value supplier selections

Negotiate and implement Contract; Execute Contract

Supplier eProcurement Set-Up

Track and Improve supplier Performance

Track Compliance

Administer Supplier Contract

Manage Catalog Content

Create and Approve Requisition

Automate Requisition to PO Process

Expedite Orders

Receive MaterialReconcile returns and Invoice Discrepancies

Authorize Payment

Develop Sourcing Strategy

Measure and Develop

Pay and Settle

High

High Basic

Basic

Val

ue a

dded

Complexity of Interaction

Issue Material / Asset Management

Invoice Discrepancies

Authoring with Clause Library

Negotiation & Approval

Analytics and Audit Tools

Enterprise Reporting

Controls

Track obligations

Rule based Notifications

Proactive alerts

Renewal Management

Automate complete Contract Lifecycle including supplier participation

Complete Contract Compliance

Plug Contract Leakages

Zero expired Contracts

Order Goods and Services

Select and Contract


Case Study – Inventory OptimizationClient Operations – Brief Summary:The client is one of the largest communication service providers in India (26.5% market share with 22.3 Million subscriber base). Operates in 23 Circles. Offers services in Mobile Telephony, Enterprise services (Voice & Data), Broadband services and Long distance services.

• A rapidly expanding telecom market in India fueled

exponential growth in the subscriber base of the

Client, the country's largest mobile service provider.

But business processes that were not yet fully

integrated and a complex infrastructure building that

could scale at speed meant that the Client had to

redefine and standardize the entire supply chain

operations.

Management Challenges

Benefits

Assess the current Supply Chain Processes covering

following processes :

• Plan / getting demand

• Identify Suppliers

• Material / Service Requisition

• Receipt, Storing, Usage

• Supplier Payments

• Categorization / Category Strategies

• Manage Supplier / Partner Relations

• Manage Performance

• Manage Product / Service Information

• Manage Accounting

• SCM Processes would be covered across the

organization (incl all circles)

• Envision “ Should – Be” processes

• Detailing Should – be and documenting and roll-out of

the same

• Identify Point Solutions for process areas that can be

digitized

• Roll out and implement Processes and Solutions

Wipro Approach

© 2009 Wipro Ltd - Confidential

Thank You

Name : Krishnamani J

E-mail : [email protected]

Contact us at [email protected]

mailto:[email protected]�

mailto:[email protected]�

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