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					   MIM 524
Global Sourcing
   Class Six
Agenda

 Supplier Performance/Management
 TQRDCEB Discussion
 Cost management
 Guest Speaker – Tom Alessi
 Cont. 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 Deserves
A Supplier Will Only Be As Good As It Has To Be
The 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 Focus
1. Establish & Maintain LONG Term
   commitments
2. Promote effective communication
3. Obtain mutual agreement on
   expectations and goals
4. Supplier’s process is an extension of HP
5. 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 Categorizes
Several Metrics are utilized to generate a
  score by Category
Each 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
  Relationships
   In Writing (Email, Formal Letter)
   Verbally (Conference Calls, Meeting, etc.)
   Face-to-Face (Relationship Focus)

Business Communication
  Frequency (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 accountability
   Currency Risk
   Governmental Policy Changes
   Logistics Expertise for Geo
Additional Supplier Relationship Management
  Issues?
   Executive Engagement - Alliance
   Day to day – micro feedback
When Do You Need to Change
Suppliers?
Things to Consider…
 Consistent Crisis Mode – not reliable
 Losing competitive advantage
   Others surpassing them
 Failing to invest for the long term
   Milking the cash cow with out re-
    investmetn
 Core competency shift in the supplier
   Are they changing their focus?
 Better End to End Solution?
 Niche specialization
 SCOR Metrics
 Supply Chain Reliability/Flexibility

On-Time Delivery       Percentage
Lead Time              Days
Fill Rate              Percentage
Perfect Order          Percentage
SC Response Time       Days
Upside Prod’n Flex     Days or Percentage
Liability              Custom Vs Standard %
Cost Management
When It Comes to Cost Management, Every Technique
Counts
   Cost Management
   Methodologies
 Methods                      What is it?                                      Benefit

                An analytical technique to estimate             Use as a basis in driving cost reduction at
   1.Should-
                suppliers’ cost of goods/services, which is     pricing negotiation & managing cost to
      cost      to use in negotiations and with internal        achieve cost saving
   modeling     customers / stakeholders

                 A process that systematically gather data       To identify relative cost position and
    2.Cost       on other companies’ cost & strategies via       industry best practices showing the
 Benchmarking    surveys, &/or telecons to identify relative     most potential to save $, use them to
                 position & opportunities for improvement        achieve BIC pricing and practice


                The interval of price re-negotiations,         Systemically conduct frequent i.e.
                determined by assessing factors, i.e. market   quarterly pricing negotiations proved to
3.Negotiation   conditions, internal customer, cost            deliver better cost reduction results vs.
 Frequency      requirements, # of suppliers…                  those negotiate less


                A process to reduce total # of suppliers       Reduce a company’s overall supplier chain
 4.Supplier     thru. qualifying & contracting w.              management spends by “5%-15% or more”
   Chain        integrated/global strategic suppliers to       over time & help to focus on the areas of
Consolidation   consolidate supply chain                       greatest opp.*
                                                                               (*McKinsey & Company).

                A technique using contracting language         Ensure we will not pay more than the
   5.Not to     requires that supplier "not to exceed"         NTE, in the meantime, neg. frequently for
   Exceed       certain price for the time period & make       lower prices to get additional cost
Pricing (NTE)   a commitment to decrease its pricing by        saving (w. cost curve in place)
                % over time
Cost Management Methodologies
Methods                     What it is?                                       Benefit

                 A techniques that negotiate cost              As currency devaluating renegotiation
6.Optimizing     reductions &/or avoiding price                may realize additional cost savings
 Exchange        increases as exchange rate                    due to new exchange rate
   Rate          fluctuations


                A pricing model - a supplier agrees            Keep lower and competitive cost
  7.Meets       contractually to reduce its price to match     * It is intended for only “Selective
                                                               Application” when the proper requirements
Comp Pricing    any valid alt. price proposal from other
                                                               are met, not a 100 % applicable BKM!
                supplier for “like Items”.

               A negotiated, documented discount term         Standard discount term is 2%, 10, net 45.
8.Discount     on the purchase price of a                     It could result significant savings that
               product/service, in exchange for early         impact to Profit & Lose, and Gross
 payment
               payment of the invoice                         Margin if executed properly
  terms
                Sourcing products/services from/in low        Focusing on material, labor, burden or
                cost geo to maximize cost advantage           operation cost drive lower cost on
9.Use of low    while minimizing risk in                      products/services than those of high cost
 cost geos      availability/quality.                         geo w. fair availability/quality.

               A online tool/sys. - suppliers. are invited
                                                             Streamline cost reduction negotiation and
               to bid online interactively during a
 10.Internet   scheduled time period - All bids/data are
                                                             award business based on lowest total cost
 Negotiation                                                 analysis. Eliminate human factors,
               anonymous, remain confidential & secure
                                                             fax/paper/email…
Cost Management Methodologies

 Methods                      What is it?                                      Benefit
                  Contracting language specify MFC, for          Supplier will reimburse for any price
   11. MFC        like parts w/ similar specifications, w/ 3rd   discrepancies w. all audit costs if
   Pricing        party audit rights to ensure lowest price      discrepancies are discovered. Thus may
                  obtained for products/services                 ensure us getting lowest pricing.

                 An approach that Component Vendor               Ensure lower and/or competitive pricing.*
                 agrees to provide us “Contract Pricing”         It is intended for only “Selective
 12.Pass Thru    to CEM, which address price delta               Application” when the proper
    Pricing      between ours & CEMs’                            requirements are met, not a 100 %
                                                                 applicable BKM!

                 Contracting pricing effective date for          Achieve cost saving by applying new
                 products order placed or delivered – if         lower negotiated price right away or
  13.Price                                                       delaying to apply new higher price – only
                 new price is lower, apply for all material
 Effectively                                                     apply new higher price with PO placed
                 received at dock/WIP after the effective
                 date                                            after effective date
                  Change the product’s design or                 Less expensive designs w. the same
                  something. about the product to make it        form/function/quality earlier in design
 14.Design for    cheaper to manufacture, assemble, or           process w. lower-cost alternative parts or
     Cost         use cheaper components as to reduce            materials could save mls $
                  the costs
                  AKA “Price Masking”: Component
                  Vendor negotiates a price with CEM (>          Cost saving through “Rebate”
 15.Rebates       Intel Contract Pricing), “rebates” the
                  delta between negotiated price &
                  Contract Price to Intel
Cost Management Expectation
  Meet pricing targets
 Quarterly cost reduction (as appropriate by commodity
 Expect Supplier to come up with new ideas to drive down total
    costs
 Examples:
      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 Chain
Product 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 cost
Freight 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 Sharing
Reward and Recognition
  Tie performance to award of business
  Via scorecards, other?
Training and Process Improvement
  Supplier Training
  Six Sigma/Lean
Process & Cont. Improvement
Supplier Training Classes
Statistical Process Control
7 Step Problem Solving
Second Tier Supplier Qualification Process
Cycle Time Reduction
Lean/Six Sigma
Quality Tool Training
    Benchmarks                                                Six Sigma Impact
                      1,000,000               Tax Advice
                                              (phone in)                      Order Write-up
                               100,000
                                                                                 Doctor Prescription Writing
         Defects per Million




                                10,000                                                Restaurant Bills

                                               Average                                    Manufacturing
                                 1,000
                                               Company
                                                                                                    Medical Devices
                                  100

                                                                              Best-in-Class
                                    1
                                          1             3                 4              5               6            7
                                                                      Sigma Level
                                         The higher the sigma, the lower the defects
Source: Six Sigma: A Breakthrough Strategy, Quality Progress, May 1998.
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 process
   Promotes sharing of BKMs (i.e. eSRC templates, questions, etc.)
      within and/or across teams & orgs
   Extends the SRC process to more suppliers & allows input from
      more stakeholders
   Drives spec compliance without requiring detailed knowledge or
      understanding of the SR&R spec
        Online Negotiations (formerly eAuctions)
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
Buyer’s Perspective




                      Source : Freemarkets
Intel Example of leveraging the Web

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.
Current Events
Next Class
 Commodity Studies Due at Beginning of
  Class
 Negotiation Strategies
 Sustainability – Starbucks Class Discussion
 Current Event related to Sustainability
Questions?
 Performance Appraisal
 Supplier Report Cards
Establish Performance Standards
   Goals and Metrics
Provide Decision Making Data
   Awards & Allocations
Compare and Evaluate
   Ranking & Rating
Develop Feedback Procedures
   Supplier Business Reviews (SBR’s)
Corrective Action as Necessary
   SCAR – Supplier Corrective Action Request

				
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