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Management of Supplier Innovationfor Competitive Advantages

Purchasing as a Tool for Growth

1 Michel Philippart

Michel Philippart

� 7 years in consulting� Booz Allen Hamilton� McKinsey

� 7 years in international purchasing development� PepsiCo / Frito-Lay� Scotts

� Today working independently - “Sourcing Plus”� Consulting� Training / Teaching / Coaching� Interim� Site: www.sourcing-plus.com

2 Michel Philippart

Is Purchasing a Basic Survival Skill?

� Your best competitors work on purchasing as hard as youdo

� … and obtain similar price decreases� … that the sales force must give away to stay competitive� … which does not improve either competitive position or

profitability� Those who cannot follow disappear. Is purchasing a basic

survival skill?

3 Michel Philippart

Or Can We Leverage Supplier Relation toa Hidden Competitive Advantage

CompetitiveAdvantage

� Price premium� Product positioning� Sales activity/market share

M&S

� Quality� Product performance� Productivity

Production

� Privileged supplierrelationship/ development

� TCO/value generationacross business system

� Unique capabilities

Purchasing

Open tocompetitorscrutiny

Largelyhidden

� New product introduction/Patents� Innovation rateR&D

4 Michel Philippart

Exclusivity Can Generate Profits MuchFaster Than Price Decrease

Increase sales revenues by10%: Contribution: +200k€

Decrease cost of keycomponent by 10%: +68k€

€€€

Market Share 50%!

5 Michel Philippart

Agenda

1. Revenue focus in Purchasing

2. Levers of supplier contribution

3. Discussion

6 Michel Philippart

When Traditional Purchasing Falls Short

Can I decreasemy costs

continuously?

Do I need tooutsource or

maintain internalcapability?

How do I speedinternational

growth safely?

Who will providethe innovationthat will growmy markets?

• Everybody negotiateshard

• Differentiation islimited as many goodcompanies leveragethe same approaches

• Competition formarket share quicklyerases the negotiationbenefits as they flowto the end users

7 Michel Philippart

Across IndustriesRetailers

• Can suppliers help me reduceworking capital?

• Can suppliers help me improvestore appearance?

• What supplier strategies will allowme to differentiate from otherretailers?

Luxury Goods• How can I secure strategic raw

materials in short supply?• How do I control and improve the

performance of essentialsubcontractor craftsmen

• How do I insure that my bestsubcontractors are not attracted bycompetitors?

Packaged Goods• How do I leverage supplier

innovation to differentiate beyondadvertising?

• How do I speed up development ofcountries where I have acquiredlocal players

P&C Insurer• How to move claim related

purchasing from an administrativetask to a way of securingcompetitive advantages

• Better, faster claim processing• More replacement options• Regional agreements with

suppliers

8 Michel Philippart

Expanding the Role of PurchasingSupplier Management for growth•Source of innovation / uniquecapabilities and raw materials

•Faster introduction to new markets•Exclusive knowledge capture andleverage

Prof

itRe

venu

es

Impa

ctNA

Tactical Strategic

Scope

Supply Chain Management• Simplify• Optimize TCO*• Increase transparency,knowledge of supplier markets

• e-Purchasing

Traditional Purchasing• Leverage scale• Negotiate• Divide and conquer• etc.

9 Michel Philippart

Benefits of Each LevelBenefits of Supplier ManagementFocus of Supplier Management

Exclusivity pricingDifferentiation andlifecycle market value

Full costoptimizationTotal cost of ownership

PriceNegotiation

Value

10 Michel Philippart

Potential Impact of Supplier DevelopmentAcross Industries

Manufacturing /Back officeDevelopment Distribution/

DeliveryMarketing andSalesIndustry

Automotive

ConsumerProducts

FinancialServices

FineChemicals/Pharma

Electronics

Not applicableSome applicationsKey opportunity


� Packaging andflavoringsuppliersdevelop andproduce winningdifferentiationfromcompetitors(Frito-Lay)

� Equipmentmanufacturersco-developexclusiveproduction linetechnology thatincreases yieldand quality(multiple)

Development Manufacturing Distribution Marketing andSales

� Distributionpartner makesproductubiquitous, withlower workingcapital andmore availabilitythan competition(Dell)

� Effectivepromotiondesign andproductionprovide marketpull (McDonald)

� Global brandingdrivescomplexityreduction, moreeffectivepromotion, etc(Multiple)

Examples Across the Value Chain


Agenda



3. Discussion


International Suppliers Contribution

Supplier Innovation• Product innovation• Service improvement• Product line extension

Global Supplier Leverage• Leverage actual suppliers for expansion• Identify local suppliers in new regions• Develop suppliers in new regions as

global alternatives

SupplierContribution

UniqueSkills

InternationalGrowth

Knowledge

Seamless information leverage• Shared understanding of

consumers• Integrated supply chain

optimization• Production to consumer

constrain management


InternationalGrowth


Knowledge UniqueAssets

Skills Lever

Capture of supplier’s unique assets (physical orintellectual) to grow current markets

• Involve Purchasing with marketing when identifyingconsumer demand currently not satisfied properly

• Develop supplier capability to provide it• Manage relation with supplier to isolate new capability

from competitors


Example : Consumer Goods

Purchasing leadscross-functional teams tolift company potentials

Purchasing Marketing

Sales

ManufacturingDevelopment

Legal

Identify need for packaging withbetter barrier properties toimprove freshness Consolidate

Europeanvolume to key

suppliers

Harmonizeacross Europeto lowers costs

Capturecompetitiveadvantage

Produceon new,

dedicatedlines

Jointlydevelop

newtechnology

UKB

JapanUSA


Impact of Supplier Innovation Capture� 70 days without flavor variation vs. 15-30 for the competition

� 70/30 consumer preference in blind test

� Capture of category leadership in key markets

� 30% cost reduction over 3 years


Purchaser• Invest volume• Provide end user market

knowledge• Co-develop specifications• Commit fair return on supplier

assets leveraged

Supplier• Allocate key capacity for

exclusive usage• Target specific markets for

innovation• Dedicate best staff (research/

account service, etc.)• Open books

Win-Win Supplier Relationships


Internationalization LeverInfluence supplier development and leverage supplier structurefor global expansion

• Identify supplier’s capabilities in existing markets that are necessaryto develop / improve competitiveness in new markets

• Steer supplier’s development to match• Scan suppliers in new markets for capabilities that can be leveraged

in existing markets and insure transferInternational

Growth


Knowledge UniqueSkills


Global Solution Development

Commonalitybetween localneeds identified

Core Solutions Customization Synergies

Local / countryunderstandingintegrated to findcommonality

Standardizedapproach providecore offering

Global solutionsare fine tuned tolocal needs ifnecessary.Specificdevelopments arecompiled andmade available toother markets

Suppliers aremanaged globally

Need identified locally Solutions Synergies

Customer needsexpressed at local /country level

Local / country solutionsare developed

Synergies and globalopportunities are analyzedat a later stage

From

To


Example : Consumer Good Industry

3.0 3.5 2.8

5.3

2.9

6.2 6.8

16.4

2.12.72.5

3.1

02468

1012141618

Home Base Region 2 Region 3 Region 4

Price index

0

2

4

6

8

10

12

5 6 7 8

Price per Unit

Consumer Appreciation

Region 4 Supplier

Home BaseSupplier

Price: -42%

Impact: +13%

Complex flavor


� Global expansion via M&A or green field

� Increasing global trade

� Regional integration to capturecompetitive advantages

Purchasing Leverage� Development of new regional

supply base� Extension of current supplier base

into new regions� Leverage of suppliers with global

assets� Regionalization/ Globalization of

Purchasing

Global Purchasing Leverage


� Integration of suppliers from new regionsinto supplier network and potential use inhome market

� Improve knowledge base about cost ofmaterials, capabilities, etc.

� Targeted identification and developmentof new suppliers for global use

� Relation with suppliers that are growingvia M&A

� Traditional market base leverage� Improved supply options� Access to new production

methods� Better information

Leverage of New Suppliers


Knowledge Lever

Jointly manage information from development toconsumer

• Targeted development• Seamless transfer of information from POS to supplier

to integrate supply management

InternationalGrowth


Knowledge UniqueSkills


Innovation Through Co-Development

0

20

40

60

80

100

Percent of R&D budget spendon co-development withsuppliers

Relevanceof supplier-basedinnovation

AutomotiveToday'sinnovators

Middle High Very high

"Thepack"

CommodityChemicals

Steel

Futuredevelopment

ConsumerProducts


Example : Restaurant Chain

Purchasing leadscross-functional teams tolift company potentials

Purchasing Marketing

Sales

ManufacturingDevelopment

Legal

Identify safe low cost toy as keytraffic builder

Build relationwith propertiesfor continuousstream of toy

themes

Design safetoys around

themes

Capturegrowththrough

« childrenappeal »

Produce inethical butlow costsources

Assembleexternalteam of

designersand safety

experts

Far East

USA

USA


Impact of Supplier Innovation Capture

� Market dominance worldwide� Key competitor being sold� Other competitors marginal / local players

� Higher return than competitors

� Only chain to grow


The Role of the Supplier ManagementTeam

Scanning Capturing Isolating

� What are therelevantinnovations thatcan serve myvalue chain

� How to accessthem?

� Innovation scan� Current

suppliers� Venture

capital� Product /

service match� Culture match� Support that

innovator needsto deliver

� Constrainedassets

� Contractualexclusivity

� Co-ownership

Identifying

� Business casedevelopment

� Win-winproposition

� Implementation


Requirements

� Purchasing integrated at n-1 level, part of CEO leadershipteam

� Purchasing not driven only by price variance but by overallcontribution

� Purchasing is a high value added function staffed withtrained professional. They have limited or no tactical taskssuch as supply coordination


Agenda



3. Discussion

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