MIM 524Global Sourcing

Class Six

Agenda

Supplier Performance/ManagementTQRDCEB DiscussionCost managementGuest Speaker – Tom AlessiCont. Improvement – Example in Class

Cycle Time Reduction Exercise

eProcurement Tools – Changing Tech.Current Events/Next Class

Supplier Performance and Relationship Management

Dave Hoover’s Purchasing Axioms

A Firm Has The Suppliers It DeservesA Supplier Will Only Be As Good As It Has To BeThe Best Way To Get More From Suppliers Is To Ask

For It

Measuring Supplier Performance

Quality Cost to Target On Time Delivery Flexibility Problem Resolution Productivity Improvement (Total Cost) Their Supplier Management Program Progress Toward Certification Technology Other Important Criteria

The initials TQRDCEB stand for:

Technology Quality

Responsiveness Delivery Cost Environment (social context) Business (financial position)

Kropf, W. C. & Russell, P. L. (N.D.). Hewlett-Packard's Packaging Supplier Evaluation Process and Criteria. Retrieved May 24, 2009 from: http://www.hp.com/packaging/Procurement/paper.doc

HP Focus1. Establish & Maintain LONG Term

commitments2. Promote effective communication3. Obtain mutual agreement on

expectations and goals4. Supplier’s process is an extension of HP5. Team approach to achieve performance

improvements (proactive/collaboration)

Ranking and Weight Strengths• Technology 10%• Quality 25%• Responsiveness 15%• Delivery 15%• Cost 15%• Environment 5%• Business 15%

These weights will change based on the supplier engagement and priorities.

Categories/Sub CategorizesSeveral Metrics are utilized to generate a

score by CategoryEach of these sub categories also carry a

different weight“Musts” Vs “Wants”

MUST is minimum criteria to succeed WANTS are the cont. improvement areas to

provide TRENDING

Measuring Buyer Performance

Forecast Accurately Share Information Minimize Rush Orders and Schedule Changes Focus on Total Cost - Not Price Pay Bills On Time Manage Supplier Relationships Contractual Protection and Liabilities Supplier Management/Performance Other Important Criteria

Buyer/Supplier Relationships

Establishment and Maintenance of Business RelationshipsIn Writing (Email, Formal Letter)Verbally (Conference Calls, Meeting, etc.)Face-to-Face (Relationship Focus)

Business CommunicationFrequency (Event Based, Structured)Formality (Automated Vs Relationsional)

Purchasing Tools and Buyer/Supplier Relationships

Reverse Auctions Early Supplier Involvement (ESI) Benchmarking

Benchmarking is the process of assessing your position against best in class

Suppliers can contribute to this effort Continuous Improvement

Continuous Improvement is the process of ongoing improvement in all categories of supplier management

Joint collaboration to raise everyone’s capability World class firms have institutionalized both

International Supplier Performance Management

Additional Supplier Performance Issues?Supply Chain accountabilityCurrency RiskGovernmental Policy ChangesLogistics Expertise for Geo

Additional Supplier Relationship Management Issues?Executive Engagement - AllianceDay to day – micro feedback

When Do You Need to Change Suppliers?

Things to Consider…Consistent Crisis Mode – not reliableLosing competitive advantage

Others surpassing themFailing to invest for the long term

Milking the cash cow with out re-investmetn

Core competency shift in the supplierAre they changing their focus?

Better End to End Solution?Niche specialization

SCOR Metrics Supply Chain Reliability/Flexibility

On-Time DeliveryLead TimeFill RatePerfect OrderSC Response TimeUpside Prod’n FlexLiability

PercentageDaysPercentagePercentageDaysDays or PercentageCustom Vs Standard %

Cost Management

When It Comes to Cost Management, Every Technique Counts

Discount payment term

s

Use of low cost

geos

Optimizing Exchange Rate

Cost benchmarking

Negotiation

frequency

Rebates

Should-cost modeling

Inte

rnet N

egotiatio

n

Effectiv

ity d

ate

Pass thru

pric

ing*

Supplier C

hain C

onsolidatio

n

Most Favore

d Custo

mer P

ricin

g

Design for cost

Meets C

omp P

ricin

g*

Not to E

xceed Pric

ing (N

TE)

Cost Management Methodologies

Methods What is it? Benefit

3.Negotiation Frequency

The interval of price re-negotiations, determined by assessing factors, i.e. market conditions, internal customer, cost requirements, # of suppliers…

Systemically conduct frequent i.e. quarterly pricing negotiations proved to deliver better cost reduction results vs. those negotiate less

1.Should-cost

modeling

An analytical technique to estimate suppliers’ cost of goods/services, which is to use in negotiations and with internal customers / stakeholders

Use as a basis in driving cost reduction at pricing negotiation & managing cost to achieve cost saving

2.Cost Benchmarking

A process that systematically gather data on other companies’ cost & strategies via surveys, &/or telecons to identify relative position & opportunities for improvement

To identify relative cost position and industry best practices showing the most potential to save $, use them to achieve BIC pricing and practice

4.Supplier Chain

Consolidation

A technique using contracting language requires that supplier "not to exceed" certain price for the time period & make a commitment to decrease its pricing by % over time

Reduce a company’s overall supplier chain management spends by “5%-15% or more” over time & help to focus on the areas of greatest opp.*

(*McKinsey & Company).

5.Not to Exceed

Pricing (NTE)

A process to reduce total # of suppliers thru. qualifying & contracting w. integrated/global strategic suppliers to consolidate supply chain

Ensure we will not pay more than the NTE, in the meantime, neg. frequently for lower prices to get additional cost saving (w. cost curve in place)

Cost Management Methodologies

Methods What it is? Benefit

6.Optimizing Exchange

Rate

A techniques that negotiate cost reductions &/or avoiding price increases as exchange rate fluctuations

As currency devaluating renegotiation may realize additional cost savings due to new exchange rate

8.Discount payment

terms

A negotiated, documented discount term on the purchase price of a product/service, in exchange for early payment of the invoice

Standard discount term is 2%, 10, net 45. It could result significant savings that impact to Profit & Lose, and Gross Margin if executed properly

9.Use of low cost geos

Sourcing products/services from/in low cost geo to maximize cost advantage while minimizing risk in availability/quality.

Focusing on material, labor, burden or operation cost drive lower cost on products/services than those of high cost geo w. fair availability/quality.

10.Internet Negotiation

A online tool/sys. - suppliers. are invited to bid online interactively during a scheduled time period - All bids/data are anonymous, remain confidential & secure

Streamline cost reduction negotiation and award business based on lowest total cost analysis. Eliminate human factors, fax/paper/email…

7.Meets Comp Pricing

A pricing model - a supplier agrees contractually to reduce its price to match any valid alt. price proposal from other supplier for “like Items”.

Keep lower and competitive cost* It is intended for only “Selective Application” when the proper requirements are met, not a 100 % applicable BKM!

Cost Management Methodologies

Methods What is it? Benefit

12.Pass Thru Pricing

An approach that Component Vendor agrees to provide us “Contract Pricing” to CEM, which address price delta between ours & CEMs’

Ensure lower and/or competitive pricing.* It is intended for only “Selective Application” when the proper requirements are met, not a 100 % applicable BKM!

13.Price Effectively

Achieve cost saving by applying new lower negotiated price right away or delaying to apply new higher price – only apply new higher price with PO placed after effective date

Contracting pricing effective date for products order placed or delivered – if new price is lower, apply for all material received at dock/WIP after the effective date

11. MFC Pricing

Contracting language specify MFC, for like parts w/ similar specifications, w/ 3rd party audit rights to ensure lowest price obtained for products/services

Supplier will reimburse for any price discrepancies w. all audit costs if discrepancies are discovered. Thus may ensure us getting lowest pricing.

14.Design for Cost

Change the product’s design or something. about the product to make it cheaper to manufacture, assemble, or use cheaper components as to reduce the costs

Less expensive designs w. the same form/function/quality earlier in design process w. lower-cost alternative parts or materials could save mls $

15.RebatesCost saving through “Rebate”

AKA “Price Masking”: Component Vendor negotiates a price with CEM (> Intel Contract Pricing), “rebates” the delta between negotiated price & Contract Price to Intel

Cost Management Expectation Meet pricing targetsQuarterly cost reduction (as appropriate by commodityExpect Supplier to come up with new ideas to drive down total

costsExamples:

Material sourcing localization to save freight, tax…ie. PKG materials

If you see potential excess materials, try to use Cross-site leveling process

Blended AML suppliers recommendation for lower costs Bottle-neck improvement proposal to improve beat-rate Any suggestions from the buyers side to improve, ie,

business process Standardization Opportunities

Design for Supply Chain

High Level Problem Statement Cost pressures will continue and there is a need

for a different focus in driving cost out of the total supply chain.

Think “Design for Supply Chain” What are the costs that come into play beyond

the traditional unit costs we focus on today? Need to challenge the metrics for success…

What waste is out their in the supply chain and what factors are driving them?

Some Elements of Design for Supply ChainProduct Design

Common/Unique Parts Size/Dimensions/Weight of products Integration across the supply chain Other?

Material Flow Planning (Bull Whip effect) Inventory Mfg. Locations Freight/Tax Packaging Other?

Infrastructure Tools Hubs Process and Overhead Other?

Examples

Buying Bulk Volume of widgets Volume Discount Extra Inventory of widgets (inventory carrying cost) Metrics today – say get the lowest Unit cost VS lowest

total costFreight Optimization

Component allocation across entire outsourcing factory network

Each factory has some suppliers in their immediate location

Current process – drive allocation across each component supplier and each factory resulting in “cris crossing” freight to the different geographical locations

How do you encourage improved performance from your supply base?

Examples

Gain SharingReward and Recognition

Tie performance to award of businessVia scorecards, other?

Training and Process ImprovementSupplier TrainingSix Sigma/Lean

Process & Cont. Improvement

Supplier Training Classes

Statistical Process Control7 Step Problem SolvingSecond Tier Supplier Qualification ProcessCycle Time ReductionLean/Six SigmaQuality Tool Training

Sigma Level

1,000,000

100,000

10,000

1,000

100

1

De

fect

s p

er M

illio

n

1111

Tax Advice(phone in) Order Write-up

Doctor Prescription Writing

Restaurant Bills

Manufacturing

Medical Devices

Average Average CompanyCompanyAverage Average CompanyCompany

Best-in-ClassBest-in-ClassBest-in-ClassBest-in-Class

3333 4444 5555 6666 7777

Source: Six Sigma: A Breakthrough Strategy, Quality Progress, May 1998.

Benchmarks Six Sigma Impact

The higher the sigma, the lower the defects

Cycle Time Reduction Activity

eProcurement Tools & Technology

Back in the day…Before there was email…

There was Mail – slow and unreliable

There was Fax – a little faster but unreliable (don’t forget to load more paper)

Before the internet/search engines…There was the library, hard copy vendor catalogs, price lists and quarterly industry reports

Hard to maintain/easily outdated

Difficult to access/find info/share with others

Before Intranets…There were files full of processes, information, training manuals and documentation

eSupplier Report Card (eSRC)

What is it?Automation of and increased compliance to the Supplier

Ranking and Rating Spec via a web-based tool

Why is it considered innovative?Accelerates and automates the overall SRC processPromotes sharing of BKMs (i.e. eSRC templates,

questions, etc.) within and/or across teams & orgsExtends the SRC process to more suppliers & allows input

from more stakeholdersDrives spec compliance without requiring detailed

knowledge or understanding of the SR&R spec

Description:

An online negotiation capability, allowing real-time bidding by multiple suppliers, within a singular negotiation forum, that utilizes strategy and the Internet to achieve cycle time reduction and the lowest total cost. 

Innovative features:

Uses Internet technology to create a virtual dynamic marketplace environment, providing real-time bidding info to suppliers on their position relative to the competition. Bids/ RFQ’s were previously a manual process, generally executed through e-mail or snail-mail

Online Negotiations (formerly eAuctions)

Online Negotiations Buyer’s Perspective

Source : Freemarkets

Intel® WebSuite

Intel® WebSuite is comprised of several key applications:

Intel® Web PO: Suppliers view POs and PO status on the Web at any time

Intel® Web Invoice: Eliminates paper invoices and auto-processes payments

Intel® ASN: Suppliers can send information about shipments to Intel employees

Intel® Payment Tracker: Find invoice payment status online

eForecast: Suppliers receive forecast signals and provide responses on the Web at any time.

Intel Example of leveraging the Web

Current Events

Next ClassCommodity Studies Due at Beginning of

ClassNegotiation StrategiesSustainability – Starbucks Class DiscussionCurrent Event related to Sustainability

Questions?

Performance AppraisalSupplier Report Cards

Establish Performance StandardsGoals and Metrics

Provide Decision Making DataAwards & Allocations

Compare and EvaluateRanking & Rating

Develop Feedback ProceduresSupplier Business Reviews (SBR’s)

Corrective Action as NecessarySCAR – Supplier Corrective Action Request