proc.ppt
Transcript of proc.ppt
Modern Procurement
Yossi SheffiYossi SheffiMIT Engineering Systems Division
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OutlineRole of procurement“Make vs. buy”Strategic considerationsCommitment vs. variable buye-ProcurementCombinatorial procurementExample: transportation RFP – system RFP – lane Spot market
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Purchasing as % of Sales
54%
28%
22%
60%
57%
34%
24%
16%
0%
10%
20%
30%
40%
50%
60%
70%
1993 1996
%
MachinaryComputer and telecomFood manufacturingTelecom services
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Components of US Corporate Purchases
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The LeadersLeading companies have unique business design requiring innovative procurement capabilities
linking suppliers into its build-to-order system creating a responsive, virtually working-capital-free supply chainuses a total systems costs approach, minimizing the sum of the supplier’s and its own costs
relies on value-added suppliers to deliver industry leading products and services, yet a leader in Internet-based procurement
capitalized on supplier relationships to extract >20% cost reduction in external purchases for the 1998 Accord
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Revenue
COGS - Material
Labor & OH
Gross Margin
Operating Expenses
Net Income (pretax)
% Improvement
“When the goal is boosting profits by dramatically lowering costs, a business should look first to what it buys.”
Fortune, February 20, 1995
Baseline
$1,000M
390M
275M
$335M
200M
$135M
5%
$1,000M
371M
275M
$354M
200M
$154M
14%
10%
$1,000M
351M
275M
$374M
200M
$174M
29%
15%
$1,000M
332M
275M
$393M
200M
$193M
43%
Percent cost reduction in Direct MaterialsILLUSTRATIVE EXAMPLE
Strategic sourcing efforts can have a significant impact on the financial performance and shareholder value of a company
The Leverage
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The Leverage
Industry Purchasing Manufacturing
Computer 1% 5%
Electrical Equipment
3% 11%
Automotive 1% 4%
Electronics 2% 6%
Required cost reduction to achieve 20% increase in profitability:
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Procurement Trends
Parts => partners Increased outsourcing across the value chain
Purchased components => subassembliesMore highly engineered technical purchases in the mix of the buyIncreasing reliance on global supply chainUse of the net for RFP/RFQ and public/private exchanges
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The Decisions:
?
Make
Buy ?Committed amount/capacity
“As needed” procurement
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“Make” vs. “Buy”From River Rouge to Resende
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“Make” vs. “Buy”From River Rouge to Resende
Overhead functions
Lochpe-Maxion
Meritor (Rockwell)
Remon
PowerTrain
VDO
Delga
Carese
Internal logistics
Union MantenVolksWagen
Chasis Wheels Engines Pax Cabins Body Paint ShopAxles
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Advantages of Outsourcing
Flexibility: convert fixed costs to variable costs Providing flexibility in adjusting capacity (both up
and down)Balance work force requirement
Reduce capital investment requirementsAccelerate new product developmentReduce costs via suppliers’ economies of scale and lower wage structureGain access to invention and innovations from suppliersFocus resources on high value-added activities (core competencies)
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Problems with Outsourcing
Labor advantages shrink as countries mature and as direct labor continues to become a smaller part of the total costSupply chain management is more difficult with off-shore suppliersLead time may be a problem with suppliers
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The Strategic RiskCreating a competitor
1914 – The Dodge Brothers turn from a Ford engine supplier to a competitor
Japanese consumer electronic industry – started with contracting for US firms for radio receivers (also adopted transistors faster)
Japanese aircraft industries?
Losing control of the channel to a supplier IBM in 1980 designed the PC, the manufacturing process
and the value chain Contracted to Microsoft and Intel “Window Machine” and “Intel Inside”
Losing control of the channel to a customer P&G and Wal-Mart => “Wal-Mart Outside”?
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Relationships Evolution
From “lowest price” public-auction-based buying
To long term partnership-based sourcing
To a portfolio approach
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ExampleA manufacturer is facing uncertain demandSupplier is offering: Low price for committed capacity (pay
whether it is used or not) Higher price for contracted capacity (use as
much as needed)
Given demand distribution, the question is how much to commit to?
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Demand Distribution
Normal Density and Distribution Functions
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3000 5000 7000 9000 11000 13000
Demand
Pro
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mm
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tiv
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Normal Distribution Function
Mean = 8,000 units/mo.
Std Deviation = 1,500 units/mo.
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Expected Costs as a Function of Committed Capacity
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
3000 5000 7000 9000 11000 13000
Committed/Dedicated Capacity
Exp
ecte
d C
ost
s
H = $800
L = $500
H-L
L
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Optimal Capacity Reservation
The optimal capacity reserved, Q*, will be at a point where the expected cost from an additional unit of capacity reserved will be approximately zero, -- One unit more or less will both increase the expected costsThe expected cost resulting from reserving the (Q*+1)st unit is H if it is sold and 0 for if it is unsoldThe probability of needing the (Q*+1)st unit is the probability that the demand will be higher than Q*, Pr(X Q*), and the probability of not selling it is Pr(X Q*)The expected cost resulting from reserving the (Q*+1)st unit is: H Pr(X Q*) + 0 Pr(X Q*)Optimality conditions: H Pr(X Q*) = LSolving for optimality:
Pr(X Q*) = (H – L)/H
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actions
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actions
• User departments establish their own requirement• Procurement organization handles the transactions• High prices, questionable terms• Little strategic value
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actions
• Utilize supplier’s fixed costs more effectively• Exploit competitive supply base structure• Leveraged buy• Enhanced negotiation & contracting• Enterprise-wide view of terms and conditions
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actions
Leverage points: • Improved coordination, forecast accuracy and predictability• Optimized logistics flow• Value added services• Streamlined transactional information and cash flows• Elimination of non-value-added activities
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actionsLeverage points: • Increased and early supplier involvement in solution design• Reduced complexity and simplified specifications• Increased standardization• Clarified response time objectives• Rationalized requirements• Controlled consumption rates• Performance incentives to achieve total cost productivity
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actions
Leverage points: • Integrate multi-company products/services and channel portfolio• Introduce creative risk sharing• Exploit suppliers’ capability and potential• Manage complex channel relationships• Cross-utilize infrastructure and operating resources among multiple parties in the value chain
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Levels of Procurement Development
1. Leveraged Buy - Volume consolidation - Supply chain optimization
2. Linked Buy - Buyer-supplier integration - Channel cost minimization
3. Value Buy - Value management - Channel optimization
4. Integrated sell - Commercial synergy
0. User Buy - Independent actions
Consume better
Buy better
Buy for less
Sell better
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Segmenting the Buy
HighLow
Low
High
Procurement Complexity
Revenue Impact/Business Risk
How much impact could the purchase have on corporate revenue over time?
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Segmenting the Buy
HighLow
Low
High
Procurement Complexity
Revenue Impact/Business Risk
How complex are the cost driver of the purchase?• Technology/design• Supply chain integration• Life cycle management
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Segmenting the Buy
Advertising Telemarketing Branded finished
goods
Critical components High-technology
products and services
Outsourced manufacturing functions
Office supplies Travel
Materials logistics services Benefits programs Professional servicesHighLow
Low
High
Procurement Complexity
Revenue Impact/Business Risk
HighestCustomerValueimpact
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Developrequirements
CreateAnnualplan
DevelopSourcingstrategy
Evaluate& selectsuppliers
Procurematerial
ManageSupplierrelationships
Goals & focus for next year (by category and totals)
Item requirements by category across the user base
Strategy to leverage buying power and minimize total costs by category
Target suppliers, negotiations and contracting
Systems, procedures, & skills to support strategy and execute well
Performance metrics, benchmarks, and improvement programs
Sourcing Process
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Procurement: The Killer B2B App.
Main idea: consolidate the buying powerCentralize controlIncrease reachAutomate processesPlayers:
Application providers (Ariba, C1, Netscape…)Consulting services (FreeMarkets, ICGCommerce…)The consortia (Covisint, Transora, e2open…)
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e-Procurement extends capabilities to business users to self-service their operating resource requirements via approved suppliers and products.
Many purchasing transactions bypass Many purchasing transactions bypass Procurement entirely, going directly Procurement entirely, going directly
to suppliersto suppliers
InternalInternalCustomersCustomers
DemandDemandManagement EnablersManagement Enablers
SupplierSupplierNetworkNetwork
InternalInternalSystemsSystems
CorporateCorporateIntranetIntranet
ProcurementProfessionals
InternalInternalSystemsSystems
Dep
art
men
t A
Dep
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men
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Dep
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Dep
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t B
INT
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NE
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Payments
Order Status
Orders
Information
Catalogues Suppliers
PCs/Technology
Office Supplies
Copiers
Telecom
Forms
Temp Services
E-Procurement:
Automation
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e-Procurement:
Main benefit:Improved Compliance
Benefits are sustainableBenefits are sustainablewith eProcurementwith eProcurement
Time
•Initial excitement
•Early adopters happy
•Management support at its greatest
•Little to no administration required
•System limitations and administrative issues surface
•First user complaints
•Performance tracking systems installed
•Ease of use and reporting become critical
•Significant administration required
•Dismayed users may resort to old methods and sources
Phase ofContract:
Negotiate Deal
ImplementContract
Manage Compliance
BenefitsCaptured
Contract savings decline over time Contract savings decline over time due to due to compliance and measurement compliance and measurement problemsproblems
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e-Procurement Applications Landscape
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IBM Case
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AAAAA+AAAA-A+AA-BBBBB
6/90: $117
90 91 92 93
6/93: $41
IBM Fortunes
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The Turnaround
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Number of Procurement Organizations –Hundreds!
CountryDivisionBusiness Units
Number of contracts per supplier – Average 5
Procurement Population 5% Sourcing75% Fulfillment20% Contracts/Others
Transactions
Production “Automated” PurchaseOrder/Invoice
General Procurement – “Manual” PurchaseOrder/Invoice
Business Metrics Early 1990’s
Savings/Competitiveness ?
Escapes (By Pass) 45%
Audit Satisfaction 47%Client Satisfaction 40%
P.O. Processing 30 daysCycle Time
ContractCycle Time 6-12 monthsLength 40 (+) pages
Procurement 1990 - 1994
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Transaction Automation
Process Optimization
Strategic Procurement
ROI
TECHNOLOGY
The Transformation
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PROCUREMENT STRATEGY, PLANNING, PROCESS IMPROVEMENT
Information WarehouseNetwork & Topology
MARKETINTELLIGENCE
SUPPLIERINTELLIGENCE
QUOTING
SOURCE SELECTION
CONTRACT
NEGOTIATIONCATALOGS
FORECASTPLANNING
REQUISITION
APPROVAL
PURCHASE ORDER
INVOICE
ACCOUNTSPAYABLE
PAYMENT
BANKS
–D&BConnect’ns–Market–BasketAnalysis
–SupplierProfiles
–IndustryScoringSys
–InternetLinks
–Auto-BidCycles
–InternetQuoting
–InternetQuotingInteg.W/FrongEnd App
–ContractLead Client
–GlobalAccessibility
–ContractOn LineTool
–WEBAccess
–IdentifyRequiredCatalogs
–3rd PartyHosting
–BuyerlessOptions
–OBI/XMLCapability
–Punchout
–IntegratedWith ERP,TradingNetwork
–ExpandedAutomation
–Buyerless
–SkillsMatching
–WorkflowWEBEnabled
–ElectronicApprovals
–ERPIntegratedThroughoutCompany
–EDI/XMLCapability
–WorkflowEnabled
–TradingNetwork
–Chart ofAccountsLead Client
–ElectronicInvoices
–EDI/XML
–Workflow
WEBEnabled
–Positive & NegativeConfirmation
–ERP, SAP, I2
–ElectronicBankPayments
–Ledger
–Taxes
–Multi-Currency
–EURO
–WEB Enabled
–ERP, SAP, I2
e-Procurement
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Regional/NicheCharacteristics
•Single Commodity Specialist•Capable Industry Provider•Price/T’s & C’s Differentiation
Enterprise/Core/StrategicCharacteristics
• Self Sufficient, World Class Service Provider
• Source of Innovation and Leadership in Both Technical and Business Areas
• Long-Term, Value-add Relationship with Shared Goals / Objectives
• Capable Industry Provider• Price/T’s & C’s Differentiation
Non-StrategicCharacteristics
• Low Impact/$ Value• Regional or Local Supplier• Minimal value to mitigate purchased goods/services to other suppliers
• Defined duration
Emerging OpportunityCharacteristics
• New Technology / Product Differentiation
• Undeveloped Relationship• Uncertain Risk• Track Record to be Established
Low HighLow
High
Long Term Strategic Importance
$ Value ofPurchases
Segmenting Suppliers
35% 50%
5%10%
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Type of SupplierPercentof Spend Web Value
Core 80% Enabling greater collaboration and integration with key partners
Commodity 15% Building critical mass and extending the reach
Emerging 5% Extending the reach to niche suppliersLeverage existing suppliers
Trade Deep
Trade Broad
Trade New
Exploiting the Leverage of the Web
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B
B
B
B
B
SellerSolution
S
S
S
S
S
BuyerSolution
B
B
B
B
B
S
S
S
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e-MarketSolution
Seller Centric – Motivation is to increase revenues and reach a wider market than the seller currently serves. Driven to realize greater returns on investment as web site battles with noise on the web.
Buyer Centric – Motivation is to reduce procurement costs and increase efficiency of procurement processes.
Trading Community – Motivation is to generate revenues by providing value to members of a specific market by introducing new efficiencies and new ways of buying and selling.
Trading Communities
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Single Point of Entry to IBM Global Procurement ApplicationsProcurement Value
•Long term cost savings through cycle time reduction, reduction in applications administration cost•Increase the speed to deploy applications to customers/business partners•Maximize shared procurement information•Standards compliance from a single platform (security, data definition)
Supplier Value•Easier to do business with IBM•Register once, be recognized everywhere•Receive relevant content, messages, and offers•Increase our guests’ experience
Portal Strategy: One Customer – One IBM
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Results
5%>30%Ledger Miscodes
27,0000Suppliers Connected via Web
$330M0Savings via Web
30 days6 pages
6-12 months40 (+) pages
ContractsCycle TimeLength
95%+80%
??20%
e-Transaction: Invoice Hands Free
1 hourly30 daysP.O. Processing Cycle Time
>80%40%Client Satisfaction
+90%40-50%Acceptable Business Controls
<1%30%Maverick buying
2001Mid 1990’sBusiness Metrics