MIM 524 Global Sourcing Class Six 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 Source Management Selection Process Commodity Study Commodity and Supplier Strategies Supplier Analysis Supply Base Reduction Supplier Performance and Relationship Management The initials TQRDCEB stand for: Technology Quality Responsiveness Delivery Cost Environment Business 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 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 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 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 Verbally Face-to-Face Business Communication Frequency Formality 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 Continuous Improvement Continuous Improvement is the process of ongoing improvement in all categories of supplier management World class firms have institutionalized both International Supplier Performance Management Additional Supplier Performance Issues? Supply Chain accountability Currency Risk Governmental Policy Changes Additional Supplier Relationship Management Issues? Executive Engagement - Alliance Day to day – micro feedback When Do You Need to Change Suppliers? 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 % SCOR Metrics Expenses, Asset Utilization SCM Costs Percentage Warranty Costs Percentage Value Add/Employee Dollars Inv Days of Supply Days Cash-to-Cash Days Inventory Turns Turnover Ratio 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 to use in negotiations and with internal achieve cost saving cost customers / stakeholders modeling 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 award business based on lowest total cost 10.Internet scheduled time period - All bids/data are analysis. Eliminate human factors, Negotiation 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 agrees to provide us “Contract Pricing” pricing.* It is intended for only 12.Pass Thru to CEM, which address price delta “Selective 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 13.Price products order placed or delivered – if lower negotiated price right away or new price is lower, apply for all material delaying to apply new higher price – only Effectively received at dock/WIP after the effective apply new higher price with PO placed 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 & Intel Contract Price to Intel Cost Management Expectation Meet pricing targets Quarterly cost reduction (as appropriate by commodity Cost reduction will happen in the first month of every new quarter No volume based pricing 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 Chart Examples Making Pancakes Pumping Gas 200 500 450 400 150 350 300 100 250 200 150 50 100 50 0 0 Operation Inspection Transport Delay File Store Operation Inspection Transport Delay File Store eProcurement Tools 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 B@DT What are they is a web-based library and ? point of access to Matls info related to Planning, Organization, Execution, and Monitoring (ie, “POEM” model) Knowledge Compass is a web– based tool that captures info needed for the operation of the organization and supports ongoing exchange of information between users and designated experts KC + B@DT in combination provide seamless user access to: A library of critical info needed to operate Materials A community of experts to respond to questions on application/interpretation of biz processes and other key operations. 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. Questions?
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