MIM 524Global Sourcing

Class four

Sourcing StrategiesSupplier SelectionTotal CostOutsourcingScott Case PresentationsCurrent Events/Next Class Review

Agenda

The purchasing process

- Establish expediting routine

- Expediting- 'Trouble- shooting'

- Vendor rating- Vendor

- EstablishOrder routine

- Developorderroutines

- Orderhandling

Order

Proc. Role

Elements

Documents

- Prepare contract

- Contractingexpertise

- Negotiatingexpertise

Contract

- Assure adequatesupplier selection

- Prequalification of suppliers

- Request forquotation

Supplier selectionproposal

Get specification

-

FunctionalspecificationTechnicalchanges Bring supplier

knowledge toengineering

-

-

-

-

-

FunctionalspecificationNorm/spec.control

Definespecification

Selectsupplier

Contractagreement

Ordering Expediting EvaluationFollow up

Overdue list

- Vendor performanceevaluation

- Settling contractproblems

evaluation

- Vendor balanced score card- Vendor profile- Vendor ranking

Major bottlenecks and problemsSupplier or brand specifications: most buyers are

involved only to a minor extent in the specification phase, so the specifications of the user are often designed ‘towards’ a particular supplier

Inadequate supplier selection: Insufficient screening of suppliers on financial strengths and technical capabilities leading to discontinuities of supply in delivery stage

Insufficient contracting expertise: leading to misunderstandings on how supplier should perform and difficulties in solving delivery and quality problems

Too much emphasis on price: Decisions need to be based upon total-cost-of- ownership (TCO) rather than price only

Administrative organization: lack of clear procedures with regard to procurement or authorization of orders, leads to lack of control on purchasing expenditure and costs

Definition of concepts

purchasing function

tactical / initial ordering/ operational

Sourcing Supply

Buying

Procurement

Internal customer

Supplier Ordering

Follow up/

evaluation

Expediting

/evaluation

Speci-

fication Contracting Selecting

Collect and Analyze

Internal Requirements

• Identify Global Stakeholders

• Establish global source team

• Collect Internal Requirements

• Analyze Internal Requirements

• Validate with Source Team

Converge Internal &

Supplier Data

• ID, Analyze and Evaluate current supply base

• Analyze current strategy

• Collect Market Intelligence

• Assess Market Conditions

• ID savings opportunities

• Establish internal goals and objectives

• Prepare RFI

Develop SourceStrategy

• Commodity categorization

• Commodity Strategy components

• Commodity Strategy details

• Develop implementation plan

• Get approval / alignment & communicate

Manage SupplierRelationship

• Establish clear expectations on both sides

• Track & Report on major Performance metrics

• Regular performance feedback sessions

• Continuous improvement sessions

• Agreement on new goals & metrics

• Develop continuous process by going to Track & Report …..

Execute Strategy& Implementation

Plan

• RFQ / RFP Process• Receive, Evaluate

and Rank RFP Responses

• Supplier Qualification / Selection

• Review & Approval of Neg. Plan

• Conduct Negotiations.

• Develop Contract and Secure Internal Management Approval / stakeholder buy-in

Five Step Sourcing Process

Source Team Formation

SSPMarket

Intelligence

Supplier Selection /

Contracting / Auctions / Catalogs

Continue MISBR, SCQI /

PQS etc.

Step 1

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

PURPOSEEstablish a global/cross functional team to gather / analyze and validate internal

requirements prior to forming sourcing strategies

KEY ELEMENTS•Global Source Team Formation•Gather Internal Requirements•Analyze / Validate Internal Requirements

Defining Business Partner Requirements

PURPOSEThis step augments the internal requirements from Step 1 with industry, supply base

information and overall goals

KEY ELEMENTS•Supply Base Assessment•Assessment of Market Conditions / Intelligence•Assessment of Current Strategy•RFx•Identify Cost Savings Opportunities

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

Determining the size of the marketplace, # major suppliers The financial condition of this “industry” Barriers to entry / Which suppliers are entering/leaving? Substitute products available now or in the future The suppliers to this “industry” and their leverage or lack thereof Are there any activities in progress between two or more suppliers,

or customers and suppliers, (development, collaboration, merger, etc.) that impact the overall supply base?

What combination of the following characterizes top suppliers in the industry?Technology, Cost, Quality, Capacity, Manufacturing process

capability, Capital expenditures, R/D expenditures, Proprietary products/processes, IP, Market development focus, Global reach / presence, Procurement services

Who Buys and Sells to Whom??• Direct • Distributor/Agents (Wholly Owed, Independent)• Brokers

Market Dynamics

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

Financial Analysis/RatiosQuick Ratio = Current Assets – Inv/Current

Liability You would want this greater than 1.0

Inventory Turns = COGS/Inventory Higher is better but Industry specific

Debt to Equity Ratio = Total Debt/Total Owners Equity Generally lower is better

Net Profit Margin = Net Income/Net Sales Higher is indication of health

Return on Equity = Net Income/Total Owners Equity Low might be another “red flag”

Financial Analysis Summary Financial Ratios measure the supplier’s

financial health & performance No single ratio alone should drive your

conclusion. Use various ratios as needed to perform

comparisons: Within Company: Trend Analysis over time Within Industry: Comparison to like companies

Audits/Verification Beyond the Paper….

Manufacturing AlignmentHVM, Job Shop, etc.

Manufacturing Capability Process Controls/SPC Capacity Planning (Capital equipment, labor, etc.) Technology/Capability

Sample assessment? Training and resource productivity EHS considerations – OSHA audits?

Quality Operating Systems Yield analysis/reliability Metrology/Inspection

Materials Management Planning/Scheduling/Forecasting Supplier Management Programs MRP Tool Suite Inventory Mgt Processes (cycle counting, replenishment Models,

etc.)Locations and support infrastructure

Where, how much, channels, global presence

Step 3 PURPOSEUtilize internal data and external information to develop a source strategy (Strategic

Sourcing Plan – SSP)

KEY ELEMENTS•Commodity Categorization•Strategy Development

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

LEVERAGEEnvironment

High Value to IntelHigh Volume productsMany Suppliers

ObjectiveCost Management

StrategyLeverage Suppliers AlliancesSRM to Cost Drivers

STRATEGICEnvironmentCustom/Unique parts

Limited # SuppliersBarriers to Entry

ObjectiveSupply Flow Assurance

StrategyAllianceCapacity Purchase

COMMODITYEnvironmentNon Critical ItemsMany SuppliersEasily Substitutable

ObjectiveEfficient R to S processFew Suppliers

StrategyConcentrate on StandardizationConsider Contract

BOTTLENECKEnvironment

Low Volume ItemsCustom/Unique ItemsNew/Old Technology

ObjectiveSolid Relationship w Suppliers

StrategyConsolidate ContractManage

Criticality

to In

tel

Low

High

Low Complexity of Supply Market High

Material/Service CategorizationMaterial/Service Categorization

Categorization Categorization may help identify a baseline strategy

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

a. Supplier Selection: What key supplier selections will be made this year & what gaps will they fill (e.g. capacity, technology, global, LCG etc.)b. Supplier negotiation: What are the key negotiation strategies (Alliance, Preferred, JDA, Collaboration Agreement, Licensing, tools such as eAuction)c. Supplier management: How will the team change the way they manage the supply base (SBR, SCQI, SRC, etc…)? Supplier Consolidation Opportunities?

How will the new technologies be developed and/or sourced to gain or retain one-generation ahead competitiveness?Is the global sourcing team well engaged with the supply base in order to understand and influence technology improvements?

What changes in quality performance and how it is managed will be made to improve the quality in the commodity, goods, capital, or services? How does Industry requirements and supplier performance in this category compare with other industries, customers, and competitors? What benchmarks/requirements validate these goals?

Strategy Components

Supplier Engagement

Technology

Quality

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

How will the team change the current models for inventory, upside - downside, flexibility, liability, business continuity, service level agreements, on-time delivery, hold time, uptime, downtime, lead time, queue time, freight, logistics, etc…. to ensure uninterrupted supply/service at a lower total cost?Does the commodity have a robust business continuity plan?

What changes will be made to the cost management strategies to ensure a competitive advantage (increase negotiation frequency, e-auction, outsourcing, cost models, benchmarking, buying consortium, etc…)? What new technologies and/or quality changes can be made to reduce lowest total cost of ownership?

How will the Fulfillment methods in the commodity’s sourcing strategy change (PO, e-Payment (non-PO), p-Card, Catalogs, web scheduling, internet, intranet, p-Card, etc…) to lower total cost and improve service?

Strategy Components

Availability

Cost

Fulfillment

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

PURPOSEThis step entails execution of Strategic Sourcing Plan including supplier selection,

negotiations, contracting.

KEY ELEMENTS•RFx•Supplier Selection•Negotiations•Contracting

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

Request for…Request for Information (RFI)

High Level Budgetary estimates Preliminary schedules Feasibility

Request for Quote (RFQ) Defined Scope of Work (SOW) – Clear what is needed High Confidence Pricing and schedule commitments

Request for Proposal (RFP) Clear on expected outcome or value add needed Asking for suggestions on how to fullfill Possible to respond with different scenerios High Confidence Pricing and schedule commitments

Supplier SelectionSupplier Need

Identified

Supplier Selection

Team Formed

Material / Service

Requirements Available

Documenta-tion in Place (e.g. CNDA,

SOW)

Conduct Supplier Analysis /

Qualification & Negotiate

Selection Scorecard Finalized

Supplier Selection / Validation

Supplier Debrief

Some other factors to consider: Low-Cost Geography Supply Base USE TQRDCE EHS Compliance AS THE MODEL Supplier Diversity Legal Considerations e-biz Capabilities

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

PURPOSEGlobal Sourcing team focuses on supplier management and improvements once the

strategy (SSP) is defined and executed to.

KEY ELEMENTS•Contract Mgmt•Control of Excursions •Supplier Ranking & Rating •Supplier Biz Reviews•Benchmarking •Continuous Improvement

InternalRequirements

Market Dynamics

Develop Strategy(SSP)

Strategy Execution

Supplier Perf.Management

1 2

3

4

5

Total Cost

What is it beyond the formula?

Total Cost of Ownership

KNOWN

ASSUMEDParking

SpeedingTickets

PurchasePrice

Tax & License

LoanInterest Fees

ResaleValue

LubeAlign

Inspect

WindshieldsMufflers

Polish Filters

Drive TrainReplacements

Insurance

BatteriesBrakes Clutches

BodyWork

GasOil

Tires

4 DR

BMW

FORD

HYUNDAI

TOYOTA

2 DR.

DODGE

What is the Total Cost of PC Ownership?

KNOWN

ASSUMED

SHOULD COST

(Material + Equipment Depreciation + Labor + Factory Depreciation)/Yield)/1 - Gross Margin = Price

Is benchmark data available?

PurchasePrice

Taxes

LoanInterest Fees

ResaleValue

Hard Drive

UpgradeProductivity Costof Slow System

Service Contract

Modem

Internet Connectivity CostsRepairs

AdditionalSoftware

MemoryUpgrade

Commodity Study

Linkages

What is the difference between Price & Cost?

How do you know you are getting a good price?

Should cost models – bottoms up approachMust cost models – tops down approachCompetitive Analysis

Tear downsMarket analysisCompetitive Quotes

BenchmarksIndustry indicators and Trending

Outsourcing

Why Outsource?80% of the top 400 US companies operate on a global scale

SHANGHAI, CHINA

PHILIPPINES

U.K.

HONG KONG

KOREA

JORDAN

HONDURAS

DOM. REPUBLIC

LOS ANGELES, CAL.

SAIPAN

LEGEND Chanels & PRODUCTION SERVICES (ODMs)

PRODUCTION SERVICES

US - Hayward

SRI LANKA

DHAKA, BANGLADESH

NEW YORK, NY

F I J I

TAIWAN

MAURITIUS

SWAZILAND

ISRAEL

EGYPT

PORTUGAL

SPAIN

MINNEAPOLIS, MINN.

HAYWARD CAL.

GUADALAJARA, MEXICO

GUATEMALA

NICARAGUA

LAHORE, PAKISTAN

NEW DELHI, INDIA

FRANCE

CHITTAGONG, BANGLADESH

MALAYSIA

MADRAS, INDIA

BANGALORE, INDIA

BOMBAY, INDIA

GUANGZHOU, CHINA

DONGGUAN, CHINA

QINGDAO, CHINA

TIANJIN, CHINA

MEXICO CITY, MEXICO

THAILAND

SINGAPORE

POLAND

INDONESIA

DUBAI

KENYA

Madagascar

MILAN, ITALY

FLORENCE, ITALYTURKEY

SHENZHEN, CHINA

EL SALVADOR

BRAZIL

LESOTHO

DURBAN

VIETNAM

BAHRAIN

KARACHI, PAKISTAN

Outsourcing - Industry Trends

Outsourcing - Industry Trends – 3PLs

Description Savings RealizedRoute Design & Optimization

Closed Loop Dedicated Operations

Mode Conversion

Core Carrier Management

Rate Negotiation & Audit

Inbound Consolidation

Reverse Logistics

DC Location Realignments

Reduced Inventory

10-15%

15%

10-15%

5-10%

4-5%

20-25%

10-15%

10-12%

7-10%

Contract Logistics Savings Potential

In-source or Outsource..In-source

Buyer has cost advantageTechnology is strategic – value addIntellectual Property & Trade SecretsSunk cost of existing overhead/capacityLack of capable suppliersCore Competencies – aligned with long term strategiesOrganized Labor, Governmental or other that restricts outsourcing

OutsourceHigh capital start up or expansion costsCost advantage by scale to outsourcer & pooled purchaseVolume fluctuations and long term riskGood/Service is readily available in the marketCapacity and labor constraints with BuyerSpecialized skills/focused developmentLimited technical resources

Design and

Product

Concept

Technology

New MarketsCapacity

NPI

Geography

People Capital

Equipment

Intellectual Property

Design Flexibility and Cost of Design Changes

Cost of Design Changes

Flexibility in Design

Time

High

Low

Idea Generation

Bus. / Tech.Assessment

ConceptDevelopment

Eng. AndDesign

Prototype/Ramp-up

Full Scale Operations

Spectrum of Supplier Integration

No supplier involvement.

Supplier “makes to print.”

None

Formalized supplier

integration. Joint development

activity between buyer and supplier.

“Gray Box”

Informal supplier integration.

Buyer “consults” with supplier on buyer’s design.

“White Box”

Design is primarily supplier driven, based on

buyer’s performance

specifications.

“Black Box”

Shifting of Risk/AccountabilityWho Owns?

Design of the product? Manufacturability?Product Roadmaps and families?NPI to Low Cost Geo transfer?Test the product? Who’s test plan?Management of the material and AML*?Ownership of the supply chain?Ownership of Tax/License/Customs and Logistics?Branded Packaging/Collateral?Post Sales Support/Warranty/Repair?Market Analysis & Feedback?

* AML- Approved Manufacture List

Systems Outsourcing StrategiesOEM-in

Take a competitive of the shelf product, modify industrial design to create specific ‘look and feel’, distribute to market placeManufacturer, by definition, makes similar product

Manufacturer owns AML (Approved Manufacture List)Manufacturer owns Quality

ODM (Original Design Manufacturer)Find Manufacturer with technical/process expertise, co-develop

product according to internal spec. Manufacturer does not have similar product in production or it must

be significantly alteredIP (Intellectual Property) may be jointly owned or owned singularly

by Intel or ManufacturerAML (Approved Manufacture List) is jointly owned/developed

Intel may specify particular components of the BOM, may do pass through pricing or consignment

Hardware Outsourcing Strategies

CEM – Contract Electronic Manufacture Model Buyer owned IP (Intellectual Property) Buyer and supplier jointly own AML (Approved Manufacture

List)

PTP (Pass Thru Pricing) and Consignment are used Focus is on conversion Supplier does not market products or services to consumers

Pro’s & Con’sOEM-In Model

Pro’s – TTM, min. investment, costCon’s – Licensing, limited flex to mfg, bundle, change, reconfigure,

limited WW capability

ODM ModelPro’s – DFM (Design for Mfg), flexibility in design/configure, mfg

solutions, IP ownershipCon’s – Slower TTM than OEM-In, more investment –

operationally/supply management, limited WW capability (Ex: Taiwan)

CEM ModelPro’s – Design Control, cost at volume, WW capability, supply chainCon’s – TTM, cost with lower volumes, heavier investment

Contract Electronics Manufacturing (CEM) companies provide a range of services including traditional Printed Wiring Assembly (PWA) along with a growing suite of integrated services and business solutions

TraditionalCore Business

OEMs and ODMs continue to close the gap between services

Repair And Maintenance

DistributionAnd

Logistics

System Assembly And

IntegrationPWA

Materials Management

PrototypingDesign(PCB)

Design(Product)

Expanded Service Offering

Industry Analysis: CEM’s Vs. ODM’s

Repair And Maintenance

DistributionAnd

Logistics

System Assembly And

Integration

Design(Product)

Design

(PCB)PWAPrototyping

MaterialsManagement

Original Design Manufacturing (ODM) companies provide a range of services including traditional Product Design to basic Printed Wiring Assembly (PWA) along with a growing suite of integrated services

TraditionalCore Business

Scott’s Case Presentations

Current Events

Next ClassContract Terms and FormationGuest Speaker – Tom AlessiCurrent Events

Questions?