Global sourcingGlobal sourcing - Purdue University · 2020. 12. 12. · sourcing insourcing in...
Transcript of Global sourcingGlobal sourcing - Purdue University · 2020. 12. 12. · sourcing insourcing in...
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Global sourcingGlobal sourcing
St BlSteve BlancoVP, Operational ExcellenceElectrical Group
© 2008 Eaton Corporation. All rights reserved.
Electrical Group
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Who is Eaton? 2008 Sales- $15.4 Billion
Eaton is a power management company helping customers to utilize electrical, hydraulic and mechanical power more
f l ff ti l d ffi i tlsafely, effectively and efficiently.By DestinationBy Segment
Auto12%
Truck15%
Aerospace12%
Hydraulic16%
Electrical45%
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Global Sourcing ---Agendag g
• Supply chain priority• Considerations in sourcing globally
• Strategy alignment• Commodity analysis• Total landed cost• Risks
• Savings approach• Examples
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Supply Chain priority-pp y p y• In the past 5- 10 years… companies have accelerated
Global Sourcing…. LCC…BCC…g• Companies established global sourcing goals to take
advantage of the expected 15-30% savings from sourcing in “best cost countries”sourcing in best cost countries
• For Eaton….. 2002 8%2007 > 30%
Over $1 5 Billion per year4 4
Over $1.5 Billion per year
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Results of best cost country sourcingResults– big savings with some projects, unexpected challenges for
others….
y g
• Inconsistent Quality
Why the challenges?
• Inconsistent Quality • Demand Variation • Obsolete Inventory:Obsolete Inventory:
• Long pipelines of defective material when an issue is found
• Design changes• Added “hidden” costs of the global sourcing
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• Cultural miscommunications
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Sourcing Considerationsg
Eaton’s approach… pp
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Sourcing Considerations- Strategy Alignmentg gy gAligning Strategies – Making the “Right” Sourcing Decision
BusinessStrategy
Product StrategyProduct Strategy
Manufacturing Strategy
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Sourcing Considerations- Commodity Analysis• Natural currency
hedge• Minimize language,
• “Best in the World” Quality, Productivity
• Minimize total landed
g y y
Minimize language, cultural issuescost
• Benefit from low labor costs
• Minimize total landed
High
sity GlobalGlobalGlobal
BCCBCCBCCRegionalRegionalRegional
BCCBCCBCCManual Assembly
M l S b A bl • Minimize total landed cost
Inte
ns BCCBCCBCC BCCBCCBCCManual Sub-Assembly
• Commodities should be sourced regionally
• Source technically demanding parts from C t f E llab
or I CenterCenterCenter
of of of RegionalRegionalRegionalSupplySupplySupply
Precision Machining
Cold FormingCenters of Excellence
Low
La ExcellenceExcellenceExcellenceIP/ Specialized
SupplySupplySupply
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Low High
Logistics Cost
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Sourcing Considerations- Total Landed Cost
Piece price and tooling
F i ht/ T t tiFreight/ Transportation•Duty and tariff•Inventory carrying costs
Exposure costs•Cost of poor quality, containment actions•Product changesExpedited freight•Expedited freight
Communication / support
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pp•Supplier maintenance/ relationships•Phone, travel, etc…
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Sourcing Considerations - Risksg
E i i k
Such as…
Economic risks
Natural Disasters
Energy costs
Natural Disasters
Energy costs
Raw material availability
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The Approach- Evaluating the savingspp g g
Cost savings hurdle rateId tif i “h dl t ” b d b i• Identify a savings “hurdle rate” based on business requirements.
• Typical hurdle rates for Fortune 500 company exceed yp p y20-25% ROI
• After all costs are included, is the project attractive at X% i ?savings?
• Alternative investment factor must be inclusive of cost savings assessmentsavings assessment• What other options are available?• Each sourcing decision will carry it’s own “hurdle rates” on case-
by-case basis
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by-case basis
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The Approach-BCC Cost Savings Formula (Example %)g ( p )
Total Cost Saving = CP-(BPC+F+DT+CQ+CC+AC+RF) CP =Current Price CPBPC =BCC Piece Cost -BPC F =Freight + 5% All #’F Freight 5%DT =Duties/Tariffs + 5%CQ =Cost of Quality + 2%CC =Carrying Cost + 1%
All #’s are guidelines and need to be determined on a
bCC =Carrying Cost + 1%AC =Administrative Cost + 1%RF =Risk Factor + 5%
case-by-case basis
=Total Cost Savings
If Total Cost Savings % > Hurdle Rate %
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Then Project is a “Go”
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Examples of applying the approach…p pp y g pp
EXAMPLESEXAMPLES
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BCC Cost Savings Formula (Example #1)g ( p )
Piece CostDomestic Supplier Cost $5 25
Total CostDomestic Supplier Cost $5 25Domestic Supplier Cost $5.25
BCC Supplier Cost 3.10 Cost Savings $2.15Initial Cost Savings % 41%
Domestic Supplier Cost $5.25 BCC Supplier Cost 3.10
Cost Savings $2.15Premium Additions
-Freight (5%) 0.16
Old model would indicate project is a “Go”
Freight (5%) 0.16-Duties(5%) 0.16-Cost of Quality (2%) 0.06-Carrying Cost (1%) 0.03-Admin. Cost (1%) 0.03( )-Risk Factor (5%) 0.16Total BCC Cost Premium $0.60
Net BCC Cost Savings $1.55Cost Savings % 30%Opportunity Cost Hurdle Rate 15%
This new model would also indicate a “Go” as the cost savings of 30% has exceeded the
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as the cost savings of 30% has exceeded the 15% hurdle rate set for this project / commodity.
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BCC Cost Savings Formula (Example #2)g ( p )
Piece CostDomestic Supplier Cost $5 25
Total Cost Domestic Supplier Cost $5 25Domestic Supplier Cost $5.25
BCC Supplier Cost 4.10 Cost Savings $1.15Initial Cost Savings % 22%
Domestic Supplier Cost $5.25 BCC Supplier Cost 4.10
Cost Savings $1.15Premium Additions
-Freight (5%) 0.21t a Cost Sa gs % %
Old model would indicate project is a “Go”
Freight (5%) 0.21-Duties(5%) 0.21-Cost of Quality (2%) 0.08-Carrying Cost (1%) 0.04-Admin. Cost (1%) 0.04( )-Risk Factor (5%) 0.21
Total BCC Cost Premium $0.79Net BCC Cost Savings $0.36Cost Savings % 7%Opportunity Cost Hurdle Rate 15%
This new model would indicate a “No-Go” as the cost savings of 7% does not exceed the
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as the cost savings of 7% does not exceed the 15% hurdle rate required for this project / commodity.
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Summaryy• Support your Supply Chain priorities by maximizing the
value of global sourcing…value of global sourcing… • Strategy Alignment• Commodity Analysis• Total costs• Risks
• Conditions change have an approach flexible enough to• Conditions change- have an approach flexible enough to account for new horizon issues.
• Effective sourcing considerations can enable anEffective sourcing considerations can enable an organization to fully understand the true impact of their decisions.
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