Trade Management

Sourcing & Optimising Strategies

Module 8

2

Trade Management

Highlights

Buyer / Chief Purchasing Officer – Challenge

Supplier Base Optimization

Strategic Sourcing Process

Supplier – Financial Analysis

Risk Management

Supplier Evaluation (Performance Audits)

3

Trade Management

Purchasing Issues:

Re-focus on process capabilities

Organisations are / need changing

Supply Market and Sourcing Strategies are changing

Warehousing & Transportation are getting sophisticated

Increased use of technology and suppliers’ capabilities - to obtain visibility of the supply chain

4

Trade Management

Who are your key suppliers?

What is your organisation total spend each year?

What is the spend by category / supplier? (Eg. raw materials, IT)

What is the total acquisition cost (TAC) & the life cycle cost of capital purchases?

What is the value your suppliers provide towards your organisation’s success and reputation?

How to manage vendor performance?

What are the purchasing risks and how to manage it?

What are you Out / In-sourcing?

Whether your purchasing strategies are aligned with business strategies?

What percentage of your external spend is managed by purchasing?

Do you assess the outcome of your negotiations?

How do you develop your key suppliers?

What financial metrics to focus on?

Purchase Manager’s Issues

5

Trade Management

Purchasing Optimisation:

80/20 Rule Analysis to identify, 20% of suppliers receiving the

majority of purchase dollars Identify the minority of suppliers causing the majority of

problems 80/20 rule assumes the best suppliers receive the majority

of purchase dollars

6

Trade Management

Purchasing Optimisation (cont) With too large a supply base, the challenges

Supplier integration Collaborative agreements Supplier development Joint total quality/cost reduction efforts

To determine the right mix of capable suppliers Optimisation does not only mean adding or reducing suppliers. It can mean

switching suppliers, also !! Optimisation does not mean supply base reduction

As companies continue to rely on fewer total suppliers, the selection process takes on even greater importance

7

Trade Management

Purchasing Optimisation Benefits:

Reduced supply base risk

Lower transactions costs

Leverage leading to lower purchase costs

Ability to pursue value-added activities

Opportunity to work with world-class suppliers, which leads to improved value chain performance

8

Trade Management

Purchasing Optimisation Critical Success Factors: Time Cross-functional teams Supplier measurement system Strategy development process that considers optimisation

goals Overall supply base vision with Senior Management

support

9

Evolution of Sourcing

Cross-functional teamsGlobal

Commodity Teams,Center-led or centralised

DecentralisedBuyers

People

Technology enablementacross all strategic sourcing processes

Auctions, eSourcing,Basic optimisation

SpreadsheetsTechnology

Global; Highly collaborativeacross the enterprise andvisible at executive levels

Multi-regional,Some collaborationwith related functions

Local; Many suppliers

Reach

Balancing Total System Cost;Maximising shareholder value; Enabling productinnovation

Supplier rationalisation,Spend consolidation,Cycle-time reduction,Standardisation

Price,Transactionmanagement,Compliance

Focus

EnablementProjectTransactionParadigm

TraditionalPurchasing

StrategicSourcing

Global SupplyManagement

10

Strategic Sourcing Process

AnalyseSpend

IdentifyRequirements

AnalyseMarket

ImplementStrategy

ManageNegotiations

Award & Contract

DevelopStrategy

TraditionalProcurement

StrategicSourcing

Supplier Evaluation and

Selection

SupplierManagement

SupplierDevelopment

11

Analyse Spend

Buyer

Buying analysis across all divisions

Total number of suppliers used

Compare pricing across divisions

Consolidate spend, reduce suppliers and obtain better pricing

Tools

Spend Analysis

12

Identify Requirements

Buyer

Users - product and service requirements

Quality requirements

Product specifications

Service performance expectations

Identify different requirements across divisions

Consolidate opportunities

Tools

Specifications

Surveys

Interviews

13

Analyse Market

Buyer

Specific market conditions Rising input costs, capacity constraints, barriers to entry

Supply base constituents Many players, dominant players

Analyse new products, services or diverse suppliers

Tools

Internet research

Benchmarking

14

Develop Strategy

Buyer Based on the internal requirements, industry dynamics

Negotiate with current supplier(s)

Bring in new suppliers

Bid Reverse Auction

Traditional RFI, RFP, RFQ

Tools

eSourcing tools

Cross functional teams

Project Management

15

Manage Negotiation

Buyer

Develop criteria for evaluating proposals based on internal requirements

Initiate negotiations under chosen strategy

Compare and rank results based on key criteria

Tools

Online RFX

Weights / Scoring Models

Standard templates

Reverse Auction

16

Award Contract

Buyer

Based on results, determine best overall supplier(s) Cross-functional team decision

Finalise contract terms and conditions with suppliers Involve finance and legal

Tools

Automated weights / scoring

Online contract management

Cross functional teams

17

Implementation Strategy

Buyer

Determine how contract will be rolled out Change management strategy

Identify and track performance metrics

Communicate value to stakeholders

Tools

Supplier Performance

Supplier Portals

Spend / Diversity Reporting

18

Financial Analysis - When & Why..

When do it?

For critical items

For new suppliers

When pursuing longer-term agreements

For purchase requirements involving significant dollars

Why do it?

To manage business risk

To eliminate marginal suppliers early in the evaluation process

19

Ratio Analysis

Profitability How profitable is the supplier? What rate of return is the supplier

earning? Gross and net profit margin Return on equity Return on investment

Liquidity How capable is the supplier of meeting short-term cash

needs? Current ratio Quick ratio

20

Ratio Analysis (Contd.)

Leverage Is the supplier over-leveraged and capable of paying long-term

obligations? Debt to assets Time interest earned Fixed charge coverage

Activity How effectively is the supplier managing assets?

Inventory turnover Average collection period Return on net assets

21

Contract Management

Termination (Escape) clauses

Service Level Agreement (SLA’s)

Clear communicated specifications

Key Performance Indicators (KPI’s)

Feedback and review on a regular basis

Liquidated damages for poor performance

22

Risk Minimisation

23

Supplier Performance

24

Improvement Action Plan

25

Supplier Audit Check Sheet