Strategic Sourcing. Increasing competitiveness and profitability with effective purchasing

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Morgan Jennings
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1 Strategic Sourcing Increasing competitiveness and profitability with effective purchasing

2 Reduction of purchasing costs has significant leverage effect on profit. Impact of purchasing cost reduction on profit - leverage effect - Profit increase % Purchasing cost reduction 5-20% Profit Purchasing spend Other costs 2

3 Purchasing cost reduction has much higher impact on profit than turnover increase. Correlation between turnover increase, profit and purchasing cost reduction Turnover increase % Purchasing cost reduction 3,5% 3,5% purchasing cost reduction has same impact on profit as 30% turnover increase 3,5% purchasing cost reduction has same impact on profit as 30% turnover increase Purchasing cost reduction 1% Share of purchasing spend in % Example for: 5% return on sales 45% purchasing spend share in total product price 3

4 Global industry trends makes purchasing function even more important. Final product price structure Industry trends 100% 100% Profit Focus on core competences (innovation, design, distribution, assembly, marketing) Value added Purchasing volume Raw materials Semifinished goods Past Components Final products Services Future Purchasing of systems, modules and final products Manufacturing outsourcing to low cost countries (Eastern Europe & Asia) Services outsourcing for example: security, offices suppliers, cleaning services, maintenance, IT support etc. 4

5 Strategic sourcing involves whole supply chain in order to utilize savings potentials Conceptual idea Product design Sourcing strategy Supplier selection Managing the supply chain Bidding and negotiations Orders Order administration Traditional Procurement Process Strategic Sourcing Process 5

6 Strategic sourcing means early involvement of purchasing in product design. High Concept Influence on product cost Detailed engineering Production supplier selection Validation Production ramp-up Low Start Product development SOP 6

7 Purchasing is today the core process of international companies and closely linked with other functions. Integration of purchasing in the value chain Product development Production/ logistics Quality Controlling Sales Marketing Supply chain management Supplier development Project/ forward purchasing Purchasing controlling Strategic sourcing Procurement 7

8 Professional purchasing function consists of eight elements. House of purchasing Purchasing strategy Strategy and organisation Purchasing organisation Supplier management Strategic Sourcing Operational purchasing Key purchasing process and methods Information systems Human Resources Purchasing controlling Supporting purchasing processes 8

9 Key sourcing strategies are presented in the Strategic Sourcing Diamond by A.T. Kearney. Strategic Sourcing Diamond Volume concentration Product specification improvement Optimierung der gesamten Beschaffungskette price Best evaluation Sourcing strategies Joint process improvement Global Sourcing Relationship restructuring 9

10 Sourcing strategies can be identified by allocating categories by business impact and supply market complexity. High SC Positioning Matrix Leverage SC Strategic SC Expenditure level Impact on customer value Impact on product differentiation Impact on leadership technology Failure impact Category Business Impact Noncritical SC Bottleneck SC Low Low Sourcing Category Market Complexity High Level of competition Number of sourcing options Client's restraints and restrictions Client's bargaining power 10

11 Finally for each sourcing category a set of basic strategies can be assigned, depending on position within the matrix. Basic Sourcing Strategies Volume Concentration Best Price Evaluation Global Sourcing Product Specs. Improvement Joint Process Improvement Relationship Restructuring Exploit Buying Power Non-Critical Leverage Create an Advantage Bottleneck Strategic Key = High Value; = Little Value 11

12 Disciplined and structured process is a cornerstone of strategic sourcing activities. 6 Steps Representative Activities 1. Develop profile of commodity 2. Develop strategy for commodity Assess and profile supplier base Understand sourcing category positioning Access commodity data and define segments Analyse supply market competitive dynamics Understand commodity sourcing constraints/roadblocks 3. Generate portfolio of suppliers 4. Perform competitive supplier selection Identify global suppliers and supplier capabilities RFI Generate interest at capable suppliers Initiate bid execution for total commodity - RFP Finalize segment savings strategies and script negotiations Develop scenarios 5. Execute operational integration with suppliers 6. Institute continuous benchmarking of supply market Execute to plan Coach new supplier on-boarding Install monitoring and measuring system Document lessons learned Prepare toolkits and case studies Workshops and training 12

TU-C2020 OPERATIONS MANAGEMENT (5 cr) Strategic supply management

TU-C2020 OPERATIONS MANAGEMENT (5 cr) Strategic supply management 23 Sept, 2015 Doctoral candidate, researcher Mervi Vuori Department of Industrial Engineering and Management P(S)LM Capabilities Planning