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© 2009 Wipro Ltd - Confidential
Adding Up Beyond Material Costs
Total Cost of Ownership
Presented By: Krishnamani J
Wipro Consulting Services (WCS)Sustainable Global Leadership
© 2009 Wipro Ltd - Confidential2 © 2009 Wipro Ltd - Confidential2
Agenda
3
4 Cost Management First Level (Price Per Unit)
1 Traditional Levers of Cost Management
2 Cost Management Maturity Framework
Spend Analysis
5 Cost Management Second Level (Total Cost of Acquisition)
© 2009 Wipro Ltd - Confidential3 © 2009 Wipro Ltd - Confidential3
Agenda
8
9 Total Value Management
6 Cost Management Third Level (Total Cost of Ownership)
7 Opportunities
Going Beyond TCO
10 Supply Chain Interventions
© 2009 Wipro Ltd - Confidential4
Traditional Levers of Cost Management
© 2009 Wipro Ltd - Confidential5 © 2009 Wipro Ltd - Confidential5
Traditional Levers of Cost Management
Value Engineering E-sourcing Standardization Process Improvement
Automation Material Cost Reduction
Outsourcing
Logistics
Commercial Restructuring
Suppliers Management
Inventory Management
© 2009 Wipro Ltd - Confidential6
Cost Management Maturity Framework
© 2009 Wipro Ltd - Confidential7 © 2009 Wipro Ltd - Confidential7
Cost Management Maturity FrameworkBest In ClassTraditional
Organization
Technology
Knowledge
Process
Wipro Cost management revolves around comprehensive maturity modelInvolving 4 key levers , that is Organization, Process, Knowledge and Technology.
Level -1 Level-2 Level-3 Level-4 Level-5
Highly fragmented &Site based decisions.
Fragmented purchasing decisions, Some
coordination across sites
Division-based purchasing decisionsSome coordination
across divisions
Region based purchasing decisionsSome company wise
coordination
Centralized or central purchasing decisions
Enterprise wide coordination's
No Standard procedures or metrics
No formal tracking or documentation process
Purchase procedures formalized at the local
levelPerformance measured
at the adhoc basis. Limited Consistency and co-ordination in purchase procedures
Purchase procedures formalized at the
divisional level, Some standard metrics used
by the division
Purchase procedures and metrics ,
standardized the divisional or regional
level
Purchase procedures and metrics
standardized at the enterprise level.
No visibility into the spend, No knowledge of
the supplier markets
Limited visibility into spend, Limited
knowledge of local supply markets.
Visibility into spend category level,
Knowledge of regional supply markets
Visibility into spend at the supplier level
Knowledge of regional supply markets
Visibility into spend at the detailed level
Knowledge of global supply markets
No Automation,Manual processes.
No supplier coordination
Limited automationPhone, fax based
collaboration with supplier
Select processes automated
E-mail or some EDI collaboration
Combination of back office and web based enterprise focused
automation.
Web based enterprise focused automation.Complete sourcing
cycle integrated.
© 2009 Wipro Ltd - Confidential8 © 2009 Wipro Ltd - Confidential8
Impact of ineffective TCM
Issues Operational Impact Cost ImplicationsFragmented Procedures Under leveraged Spending
Increased supply and financial riskGreater potential for fraud Lack of preparedness for technology
migration
High purchase price and variance to contracted rates Penalties for missing Minimum Annual
Revenue Commitments (MARCs) with carriers (Telecom industry)
Labour – intensive processes High labour expensesDelays in processing bills Lost bills and manual search for
billing informationOverpayments for billing errors and
duplicate payments
Hidden costs for managers “pushing paper” to approve bills manually Late payment penalties Additional costs to store and archive
bills in paper format or scanning costs
Poor visibility into assets and spending Underutilized assetsNo holistic view of spending Less spend under
contract/management
Unnecessary maintenance contractsDuplicate billing Long sourcing cycles Challenges in determining spending
for specific services
Paper or spread sheet based status and tracking tools
Poor compliance Limited visibility into spending and no
view into category performanceNo automation for flagging contract
expiration
Incomplete record keeping for service disconnects reduces claims collection (Telecom Industry) Ineffective dispute management,
escalation and unresolved claims
Source: Aberdeen
© 2009 Wipro Ltd - Confidential9
Spend Analysis
© 2009 Wipro Ltd - Confidential10 © 2009 Wipro Ltd - Confidential10
Spend AnalysisM
arke
t Com
plex
ity
Resource Criticality
Bottleneck Strategic
LeverageNon - Critical
High
Low
Low High
• ChallengesEssential for operations Few sourcesHigh value and volume
• Key CostsCost of performanceTotal Cost of Ownership
• ChallengesMany options and sources Low valueLow brand preferenceHigh number of transactions
• Key CostsCost of acquisition process
• ChallengesFew sourcesFew sourcing optionsInfrequent transactions
• Key CostsCosts of plant utilizationCost of downtime
• ChallengesMany alternatives and sourcesHigh volumeLarge market capacity
• Key CostsPricing and delivery
Increase Efficiency Reduce Cost
© 2009 Wipro Ltd - Confidential11
Cost Management First Level (Price Per Unit)
© 2009 Wipro Ltd - Confidential12 © 2009 Wipro Ltd - Confidential12
Cost Management : First Level
PPU• Price per unit.
• Measures only the cost paid for each unit.
• Value realized is to the extent of unit cost reduction.
PPU
Unit Cost Optimization
Value Generation
IncreasingCustomer
Value
40%
© 2009 Wipro Ltd - Confidential13 © 2009 Wipro Ltd - Confidential13
Case study E-Sourcing : Category – Insurance Premium
Rs 6.0
Rs 2.0
Rs 4.0 66%
Event Summary
Situation• Major FMCG company• Single Lot• 9 Vendors• Pre-bid cost Rs.6.0Mn
Auction Strategy• Modified Rank auction.
Application• DPE Reverse Auction
Result• Savings of Rs.4.0 Mn• 66% below historic price
Rs in Millions
© 2009 Wipro Ltd - Confidential14
Cost Management Second Level (Total Cost of Acquisition)
© 2009 Wipro Ltd - Confidential15 © 2009 Wipro Ltd - Confidential15
Cost Management : Second Level
PPUTCA
PPU
TCA
• Price per unit.
• Measures only the cost paid for each unit.
• Value realized is to the extent of unit cost reduction.
• Reduction in cost paid per unit.
• Reduction in cost of material acquisition.
PPU
Unit Cost Optimization
Value Generation Acquistion Cost Optimisation
Level 1 Level 2
IncreasingCustomer
Value
40%
50%
© 2009 Wipro Ltd - Confidential16 © 2009 Wipro Ltd - Confidential16
Case Study - eProcurement ImplementationWorld Oil and Gas Major , AustraliaScope: Implementation of Procurement to Pay Automation of BP AMOCO with Wipro’s eProcurement EasySourceSolution
• BP AMOCO has evinced interest in procure to pay process outsourcing. This required a suitable technology platform for the transition and management of processes .
• Wipro proposed implementation of its eProcurementEasySource solution The pilot rollout was intended to evaluate and test the concept and efficacy of a procurement outsourcing implementation.
Challenges
How Wipro helped
Process Automation enabled for the following procurement processes
• Catalog with Item Browser limited to Two categories and all related child items
• Shopping Cart and Check out functionality in the catalog • Creation of Purchase Requisition (customized to
BPAMOCO format) • Approval Workflow of Purchase Requisitions limited to
two levels of hierarchy• Creation of Purchase Orders from Requisitions.
Aggregation of PRs into one PO not included• Uploading of Application data • Maintenance of Application data• Email alerts
• Wipro’s scope of activities included defining the specifications requirements , fit gap assessment to Wipro solution and application customization and setup as per the requirements of BPAMOCO
• Hosting of the application at Wipro hosting infrastructure 24 X 7 support for users over telephone and email Dial In Toll free set up and usage charges would be charged extra at actual. Dial out would be on actual and invoices with supporting documents would
be submitted by Wipro Ltd• Training for users of BPAMOCO and selected vendors User manual would be provided for users Hand holding and knowledge transfer to the users On site support for a month
Key Results
© 2009 Wipro Ltd - Confidential17
Cost Management Third Level (Total Cost of Ownership)
© 2009 Wipro Ltd - Confidential18 © 2009 Wipro Ltd - Confidential18
Cost Management Third Level (Total Cost of Ownership)
PPU
TCA
TCO
PPU
TCA
TCO
PPU
TCA
• Price per unit.• Measures only the
cost paid for each unit.
• Value realized is to the extent of unit cost reduction.
• Reduction in cost paid per unit.
• Reduction in cost of material acquisition.
PPU
Unit Cost Optimization
Value Generation Acquistion Cost Optimisation
Lower Total costOf ownership
Level 1 Level 2 Level 3
IncreasingCustomer
Value
40%
50%
60%+
© 2009 Wipro Ltd - Confidential19 © 2009 Wipro Ltd - Confidential19
Knowing Your Costs - Total Cost of Ownership
Effective Costs
Perceived Costs
Purchase Cost Logistics Cost
Inventory Carrying CostTransactional Cost
Losses and Obsolescence
Stock out and Back orders
Rejection and Rework
Set up Costs
Implementation Cost
Cost of Capital
Direct Labour
© 2009 Wipro Ltd - Confidential20 © 2009 Wipro Ltd - Confidential20
Know Your Costs
Transportation
Warehousing
Packaging
Utilization
Inventory
R & D
Capacity
Specification
Data Warehousing
Field Failures
Purchase process Cost
Purchase pricePurchase Cost + Joint Costs + In-House Costs
=
Total Cost of Ownership (TCO)
Vis
ible
Cos
tsH
idde
n C
osts
Visible Costs Vary from Organization to Organizations
All costs of all Components from raw material stage till
they are assembled into final product are considered to
come out with TCO
© 2009 Wipro Ltd - Confidential21 © 2009 Wipro Ltd - Confidential21
Know your Costs-TCO Building
30
2010
15 5
155 100
Raw materials Direct labor
Profit and overhead
Packaging/ freight
Example
Inventory Secondary operations
Total cost of
ownership
Focus on controlled cost drivers• Allows cost
reduction without affecting supplier margin
• Facilitates cooperation with supplier
• Demonstrates • cost savings
commitment to suppliers
Purchase price
Joint costs
Warranty
Internal costs
Understand elements of suppliers cost structure
Understand elements of supply chain costs
Understand elements of internal cost
© 2009 Wipro Ltd - Confidential22 © 2009 Wipro Ltd - Confidential22
Total cost of
ownership
Purchase Price
In-House Cost
Shared Cost
Main levers
• Purchase Price• Specifications/ Design• Usage Levels
• Internal Handling• Material disposal• Inventory Levels• Non compliance with
contracts
• Consignment inventory• Shipping• Packaging• Returns• R&D• Production variance/
instability- driven costs
Possible actions
• Consolidate suppliers
• Leverage scale• Eliminate middle
market• Standardize, revise
specs
Hold joint workshops with suppliers to identify and reduce
Identify major In-house costs and develop ideas to reduce
TCO approach targets all
elements of cost, not just
purchase price
Reduce Your Costs - TCO Approach
© 2009 Wipro Ltd - Confidential23 © 2009 Wipro Ltd - Confidential23
How TCO addresses problems and the TCO Continuum
Landed Cost
Bide or Quote Transport & Tarriffs
Supplier-based TCO
Price & Lifecycle costs
Internal ProcessTCO
Costs of Internal process inefficiencies
Joint process improvement
Internal and Supplier based TCO
Supplier based vs Internal TCO
Outsourcing Analysis TCO
Supply Chain TCO
TCO impact throughout Supply Chain
TCO Continuum
Flaw in Price based system How TCO addresses problems
Comparison made to a previously paid or negotiated price, which may not have been a “good” price
TCO generally compares among alternatives rather than to an absolute, historic price, with a focus on the relevant differences
Single measure like price does not provide true “apples-to-apples” comparison of alternatives
TCO levels the playing field by developing costs for the hidden cost factors and leveling the playing field
Supplier knows that you will try to negotiate ongoing price reductions, so does not give you his “best” offer
The focus is on the “total cost” of the package, so emphasis can shift from price reduction to process improvement to cut total costs for both parties
Price provides a very narrow view of true performance and value Relevant non-price issues and risks are incorporated into the analysis, giving a more holistic view of various options
Assumes that price reduction reflects good performance by purchasers, while price increase is bad
Market prices should still be considered in the analysis, but this more holistic view creates the opportunity for cost reduction even when prices are increasing
© 2009 Wipro Ltd - Confidential24 © 2009 Wipro Ltd - Confidential24
Benefits Of TCO ApproachImprovement ideas
• Process rejections
• Inventory costs In-House controlled levers
• Supplier Consolidation / re-sourcing
• Manufacture to specifications
• Reduce rejections
Traditional purchase levers
• Shared process/ product R&D
• Freight and detention costs Mutually controlled levers
Impact on costs
1-3%
0-1%
8-12%
2-4%
1-2%
1-2%
0-1%
TCO approach brings a framework to thread all cost saving initiatives under one umbrella thus helps in organizing efforts to achieve cost leadership
Overall Annual savings of
>15%
© 2009 Wipro Ltd - Confidential25 © 2009 Wipro Ltd - Confidential25
0 80 080
40752
0 43 0 24 345013623
342801500
23192613
816
6000
7 0 5 440 15 0 105
75221
0
0
10000
20000
30000
40000
50000
60000
70000
80000
Total 80 40752.1 0 42.72 0 24.4512 0 3450 13622.7 3428 0.40425 1500 2319 2612.8 816 6000 7.35 0 5.4 440 15 0 105 75220.9
Start 0 80 40832.1 40832.1 40874.8 40874.8 40899.2 40899.2 44349.2 57971.9 61399.9 61400.3 62900.3 65219.3 67832.1 68648.1 74648.1 74655.5 74655.5 74660.9 75100.9 75115.9 75115.9 0
Ordering Costs+ Selling
Cost of
BOPs
Freight
BOPCST
Rejection Cost
BOP Inventor
Difference in
Selling
Fabricator
BOPs
Fabricator RM
Fabricator
Consu
Fabricator
Inventor
Welding Cost
Welding &
Contrac
Paint Cost
Processes
Costs
Fabricator
Overhea
Inventory Costs at JCB
Inspection
Costs
Breakages at JCB
Warranty costs at JCB
Infra Costs at JCB
Quality Audit Costs
Tool Amortiz
ation Total
Building TCO
TCO : 75220
© 2009 Wipro Ltd - Confidential26
Opportunities
© 2009 Wipro Ltd - Confidential27 © 2009 Wipro Ltd - Confidential27
0 80 080
70833
0
10000
20000
30000
40000
50000
60000
70000
80000
Total 80 40752.1 0 42.72 0 24.4512 0 2880 11106.7 3428 0 525 2319 2286.2 816 6000 7.35 0 5.4 440 15 0 105 70832.9
Start 0 80 40832.1 40832.1 40874.8 40874.8 40899.2 40899.2 43779.2 54886 58314 58314 58839 61158 63444.2 64260.2 70260.2 70267.5 70267.5 70272.9 70712.9 70727.9 70727.9 0
Ordering Costs+ Selling
Cost of JCB
BOPs
Freight of JCB
BOPCST Rejectio
n Cost
JCB BOP
Inventor
Difference in
Selling
Fabricator
BOPs
Fabricator RM
Fabricator
Consu
Fabricator
Inventor
Welding Costs
Welding &
Contrac
Paint Cost
Processes
Costs
Fabricator
Overhea
Inventory Costs at JCB
Inspection
Costs
Breakages at JCB
Warranty costs at JCB
Infra Costs at JCB
Quality Audit Costs
Tool Amortiz
ation Total
Opportunities :
Strategic Sourcing
Yield / Material Substitution
Process Improvement
Direct Sourcing
© 2009 Wipro Ltd - Confidential28 © 2009 Wipro Ltd - Confidential28
Case Study – Inventory OptimizationThe ClientA leading transnational consumer and cosmetics products group
One niggling problem faced by the company was the 23 plants and 3000 MRO items per plant
Poor visibility of MRO items across plants due to non- standardized codification system
Difficult to aggregate components Difficult to optimally utilize inventory
Challenges
Key Results
Phase-1
• Studied existing code logic• Designed common uniform 8 digit code across
plants• Mapped Engg. Codes of 23 plants to new codes
and identified common items• Suggested types of MIS that can be evolved from
new codes.
Phase-2
• Conducted spend Analysis after codification and helped them optimize their inventory
• consolidate their buying to leverage along with reduction in inventory
Reduction in duplication of codes - more than 14% items across plants; Nearly 1-2% duplication in the same plant
Reduction in inventory & Identified Saving of > 15%
How Wipro helped
© 2009 Wipro Ltd - Confidential29
Going Beyond TCO
© 2009 Wipro Ltd - Confidential30 © 2009 Wipro Ltd - Confidential30
PPU
TCA
TCO
PPU
TCA
TCO
PPU
TCA
• Price per unit.• Measures only the
cost paid for each unit.
• Value realized is to the extent of unit cost reduction.
• Reduction in cost paid per unit.
• Reduction in cost of material acquisition.
• Reduction in acquisition cost.
• Reduction in Usage costs.
• Reduction in supplier management cost.
PPU
Unit Cost Optimization
Value GenerationAcquistion Cost Optimisation
Lower Total costOf ownership
Level 1 Level 2 Level 3
IncreasingCustomer
Value
40%
50%
60%+
TVM
TCO
TCA
PPU
TVM
Level 4
• Reduction in TCO.• Aligning supply
management to corporate goals & objectives.
Going Beyond TCO
© 2009 Wipro Ltd - Confidential31
Total Value Management
© 2009 Wipro Ltd - Confidential32 © 2009 Wipro Ltd - Confidential32
Total Value Management Approach
Spend Analysis
DataCollection
ElectronicSourcing
OnlineNegotiations
DecisionOptimization
ContractAward
ContractManagement
TVM
Total Cost Total Value
© 2009 Wipro Ltd - Confidential33 © 2009 Wipro Ltd - Confidential33
Approach
…….focusing on value realized to the cost incurred.
PPU TCA TCO TVM
Data Collection
Spend Analysis
Electronic Sourcing
E Negotiations
Decision Optimization
Contract Award
Contract Management
© 2009 Wipro Ltd - Confidential34 © 2009 Wipro Ltd - Confidential34
Decision Optimization
ContractAward
Award Decision
• Innovation Capability.
• Sourcing Cycle time.
• Delivery Flexibility
• Time to Market
• Forecasting
• Demand Triggers
• Demand variance
• Customer satisfaction
• Alternate Products
• Potential improvement targets
• Cost savings
Suppliers
Market
Opportunities
© 2009 Wipro Ltd - Confidential35
Supply Chain Interventions
© 2009 Wipro Ltd - Confidential36 © 2009 Wipro Ltd - Confidential36
Supply Chain Interventions : Contract Management
Overall sourcing strategy
Local and minority spend parameters
Spend AnalysisDevelop savings and budget Targets
Develop Sourcing Plan
Approve sourcing plan or Category supply strategy
Issue RFx, Conduct reverse auction
Select Supplier
Approve certain large value supplier selections
Negotiate and implement Contract; Execute Contract
Supplier eProcurement Set-Up
Track and Improve supplier Performance
Track Compliance
Administer Supplier Contract
Manage Catalog Content
Create and Approve Requisition
Automate Requisition to PO Process
Expedite Orders
Receive MaterialReconcile returns and Invoice Discrepancies
Authorize Payment
Develop Sourcing Strategy
Measure and Develop
Pay and Settle
High
High Basic
Basic
Val
ue a
dded
Complexity of Interaction
Issue Material / Asset Management
Invoice Discrepancies
Authoring with Clause Library
Negotiation & Approval
Analytics and Audit Tools
Enterprise Reporting
Controls
Track obligations
Rule based Notifications
Proactive alerts
Renewal Management
Automate complete Contract Lifecycle including supplier participation
Complete Contract Compliance
Plug Contract Leakages
Zero expired Contracts
Order Goods and Services
Select and Contract
© 2009 Wipro Ltd - Confidential37 © 2009 Wipro Ltd - Confidential37
Case Study – Inventory OptimizationClient Operations – Brief Summary:The client is one of the largest communication service providers in India (26.5% market share with 22.3 Million subscriber base). Operates in 23 Circles. Offers services in Mobile Telephony, Enterprise services (Voice & Data), Broadband services and Long distance services.
• A rapidly expanding telecom market in India fueled
exponential growth in the subscriber base of the
Client, the country's largest mobile service provider.
But business processes that were not yet fully
integrated and a complex infrastructure building that
could scale at speed meant that the Client had to
redefine and standardize the entire supply chain
operations.
Management Challenges
Benefits
Assess the current Supply Chain Processes covering
following processes :
• Plan / getting demand
• Identify Suppliers
• Material / Service Requisition
• Receipt, Storing, Usage
• Supplier Payments
• Categorization / Category Strategies
• Manage Supplier / Partner Relations
• Manage Performance
• Manage Product / Service Information
• Manage Accounting
• SCM Processes would be covered across the
organization (incl all circles)
• Envision “ Should – Be” processes
• Detailing Should – be and documenting and roll-out of
the same
• Identify Point Solutions for process areas that can be
digitized
• Roll out and implement Processes and Solutions
Wipro Approach
© 2009 Wipro Ltd - Confidential
Thank You
Name : Krishnamani J
E-mail : [email protected]
Contact us at [email protected]