Sourcing is a DIFFICULT PROCESS!
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Transcript of Sourcing is a DIFFICULT PROCESS!
Tips and tools for improving buying process!28/01/2017
So what is Strategic Sourcing?
What it is NOT
• Focused ONLY on cost• Getting the cheapest product/service• Ad-hoc activities involving only purchasing• Focused on “beating on suppliers”• Decisions based on opinion, unjustified preference or
complacency• A one-time project or decision
So what is Strategic Sourcing?
What it is
• Focused on Total Cost of Ownership (TCO)• Getting the best product/service at the best value• Driven by a rigorous & collaborative approach• Addresses all levers for savings• Decisions based on fact based analysis & market
intelligence• A continuous process
What is TCO?-Iceberg always tells us the truth
Purchase Cost
Handling
Opportunity CostLabor
CostLogisti
csOrder Processing Cost
Physical Characteristics
Inventory holding costs
Inspection Cost
Rejection CostProduct Life
Cycle
Hypothetical Scenario-Easiest one there is...Car A
Initial cost: $20,0005 years of repairs, plus normal maintenance: $7,500Value after 5 years when you sell it: $10,000
Car BInitial cost: $20,0005 years of repairs, plus normal maintenance: $2,000Value after 5 years when you sell it: $10,000
This is hypothetical so don’t worry about the depreciation cost and how the third variable came into existence.
Can Insurance be part of TCO?“We always take an insurance on ordered shipment/owned/rented stuff. Without an insurance policy we cannot ensure recovery of financial loss, therefore I think the insurance cost can be capitalized as it’s inevitable”.
Do you agree?: Yes!
Why?Because financial loss will affect your total cost of ownership. And you might have to pay again for the same product.
Complicated Hypothetical Scenario-Cloud Solutions
Cloud Solutions and SaaS.
SoftwareSoftware
Maintenance
Hardware
Hardware Support
Backup HardwareNetwork
Backup Power
Installation Support
Ongoing IT support
So complicated. Should we do it?
Frankly, we don’t have a choice.
Why? Because being a startup, we even sweep our own floor and wash our own toilet!
So what is TCO?
PRICE
Acquisition Cost
Operating Cost
Disposal Cost
SalvageCost
TCOCos t
Attributable Costs
So what is TCO?TCO = Purchase Price + ∑ attributable expenses –
salvage price
OR Qualification of “All Costs” associated with the purchasing process throughout the value chain
OR
In simpler managerial terms:Approx. of the most significant cost elements
Q: Which one do you prefer as a TCO definiton?
Cost elements to TCO Item value (EASY) Physical Characteristics (FAIRLY) Lead time (FAIRLY) Freight & Logistics (FAIRLY) Economic Order Quantity (HARD) Product Life Cycle (FAIRLY) Order Processing Costs (HARD) Opportunity Costs (HARD)
And the above are just some elements and will differ with different businesses.
Why is Economic Order Value (EOQ) difficult to calculate?
EOQ= √2(Annual usage in units)(Order Cost)/Annual carrying cost per unit
Order Cost: (Not associated with quantity
ordered)
1. Cost of PO2. Approval Steps3. Cost to process the receipt4. Incoming inspection5. Invoice processing6. Vendor Payment
Annual Carrying cost/unit
(Associated with inventor in hand)
1. Interest2. Insurance3. Taxes4. Storage Costs
Q: Is it worth the time to do such a rigorous exercise?
Identifying the TCO ElementsWith so many industries and elements, how do you bring
down those that matter?
Use the Pareto Principle80/20 Rule
“Only 20% of all elements that matters for 80% of the value”
Select the types of attributable costs.
Get a pen. Paper is coming
through. Its an exercise!
Should you always use TCO? No!
Total Cost of Ownership Differential Cost
Total Value of Ownership Differential Value
No
No
Yes
Yes
Does the Revenue
effect differ between
alternatives?
Is there a simple choice between
alternatives?
How about Differential Cost?
Cost Driver 1
Cost Driver 2
Cost Driver 3
Cost Driver 4
Cost Driver 5
Price
Cost Driver 1
Cost Driver 2
Cost Driver 3
Cost Driver 4
Cost Driver 5
PriceDifferential Cost
The reason I say that L1, L2, L3 process is obsolete.
How about Total Value of Ownership (TVO)?
Supplier
Packaging Machine Manufacturer
Customer
Customer’s Customer
Sells a new component at a significant high price
(Enhances Wrapping Possibilities)Manufacturer gains higher
revenue
A better shipped product.
Less damage/Less complaints
Sells the machine a higher price
TCO/Differential Cost Analysis
Brand in turns receives a better value. That’s
Customer Perception.
So in short… Price is not the right indicator of overall
purchase cost. List the elements that affect the total cost
of ownership. Create value in the process at the extreme
end. Devise a competitive negotiation strategy.
6 Bad Signs for Unethical Suppliers1. The price of the product/service is significantly lower
than the competition. 2. Documentation is absent (or questionable).3. There are complaints or controversies over the quality
of the product/service. 4. The environmental impact of the item is overlooked or
minimized. 5. Gifts are offered as a "token of appreciation".6. Any conflicts of interest.
YOU CAN DO THIS!
Thank You!