Strategic Sourcing: Managing Supplier Relationships for Business Success, Study notes of Business Administration

Download Strategic Sourcing: Managing Supplier Relationships for Business Success and more Study notes Business Administration in PDF only on Docsity! The Challenge of Strategic Sourcing As the role of the supplier has expanded, a new business vocation has emerged: strategic sourcing. The wizards of strategic sourcing are the commodity managers who must make a plethora of supply decisions every day — as well as rethink all of the supply decisions that have been made in the past — and immediately act on these new decisions. Unfortunately, the facts associated with strategic sourcing have historically been impossible to collect on a timely basis. The following is a list of essential pieces in the strategic sourcing pie and why not aggregating and analyzing them can become costly: Spend Aggregation — Where is spend going across the entire enterprise, what is being spent with each supplier and how much is being spent on each commodity? Although these are often the most fundamental facts a company uses for strategic sourcing, they're seldom easy to collect. Companies have multiple procurement systems (or instances of the same system), multiple supplier masters and inconsistent commodity coding schemes. Spend aggregation facts are often the most powerful negotiating tool a buyer can have. Buyers can knock 15 percent off the cost of purchases simply by understanding their true overall spend on a given commodity and using that information to cut a better contract with a preferred supplier. Material Consolidation — How many ―3-inch blue widgets‖ do we buy, and do we need all of these varieties? What if we selected a preferred ―3-inch blue widget‖ and found a way to use it for all ―3-inch blue widget‖ requirements? The challenge is to establish clean, rich content about what a company buys and then analyze functional equivalents to determine preferred varieties. Studies have shown that duplicate parts cost at least $10,000 a year to maintain. One major computer company successfully reduced the variety of parts it purchased from 540,000 to 280,000 through this kind of material consolidation program, saving hundreds of millions of dollars in the process. Demand and Forecast Deviation — From a negotiation perspective, it's useful to understand where you've been spending your money in the past, but the real key is to understand where you'll be spending your money in the future, because it is never the same. The more variability exists in your business, the less likely it is that you will buy the same things from the same suppliers in the future. When this happens, you invariably pay more for the volumes that increased and you fail to live up to your commitments for the volumes that decrease, missing out on the lower unit prices you negotiated in the past. New Product Design Changes — Product design teams regularly come up with something new that must be sourced before a new product can go into production. That often means introducing a new supplier. If the sourcing team identifies these new requirements in time, they can identify potential sources, negotiate contracts and secure volume materials. If they find out too late, the new product can't ship and everyone scrambles to rush in high-priced materials or design out the hard-to-source parts. Contract Performance — Every good-sized company has hundreds to thousands of contracts in place with its suppliers. Occasionally, companies actually buy according to their contracts. Most of the time they do not. Demand changes, engineering changes and supplier short shipments often result in contracts failing to meet negotiated volumes. The actual transactions that are booked Forward Visibility — When the forecast they've been building against is no longer valid, suppliers are often the last to know. Typically, the lag time between the OEM knowing the real demand and the supplier being notified is 60 to 70 days. During this lag time, two very bad things are happening. First, the supplier is building things the OEM doesn't need and probably won't take delivery on. The cost of erroneous production will have to be eaten by someone. The other bad thing that happens is that the supplier is probably not building what the OEM needs to capture demand for truly hot sellers. This will cost revenue and market share. Design Wins — In the world of direct material, a supplier's sales success is often determined by the OEM's design team — long before a contract is negotiated. This happens when a supplier's parts, materials or subsystems get designed into a new product. By guiding an OEM design team to use preferred parts from preferred suppliers, SRM closes the loop with the suppliers who provide the most value. Content Syndication — One of the lessons learned during the B2B exchange craze was that suppliers cannot publish custom catalogs for every customer or exchange that they do business with. All but the very largest suppliers lack the resources and technical know-how to pull it off. What suppliers need is the ability to publish once and syndicate their catalog across all of their trading parties. They can still provide key customers with filtered catalogs and private pricing, but the basic content is only published and maintained once. Four steps to SRM success Oracle believes that there are four critical factors to consider for a successful implementation of an SRM solution. The first step is integration. An enterprise cannot offer SRM to its suppliers until it has automated and integrated its own internal processes. As SRM draws on information generated throughout the enterprise, including, but not limited to, product life cycle management, supply chain planning, enterprise resource planning and customer relationship management, this information should flow from a single data source. Pella Corporation, a US manufacturer of windows and doors, wanted to lower its overall costs by adopting a central web-based approach to procurement and improving the management of vendor terms and agreements. By integrating Oracle Financials and Oracle Procurement, Pella streamlined its procure-to-pay processes and achieved significant time and cost savings, while gaining valuable insight and business intelligence. Oracle Procurement enabled Pella's corporate purchasing division to cut transaction times for purchase orders from thirty minutes to five, a reduction of eighty-six percent. Pella's manufacturing division has cut clerical costs and time per purchase order by fifty percent. Tracey Buck, co-ordinator of facilities management for Pella said: 'Oracle Procurement has helped reduce the number of calls from Pella's corporate purchasing department and from vendors by as much as ninety-five percent.' Secondly, suppliers need to be connected to the enterprise. They should be able to inquire, view and transact directly with the buyer's system. The method of connecting suppliers to the business must be affordable, scalable and relatively straightforward to implement and use. The range of interface options available to suppliers - XML, EDI, web services, portals or email - means that their investment in linking to the buyer's system can be kept to a minimum. Thirdly, once a single view of the supply chain has been enabled, analytical tools can be added to help identify the areas of greatest opportunity for both the buying organisation and the supplier base, and to monitor performance. Business intelligence tools assist decision-making and can help increase profitability for both parties. For example, if over fifty percent of a month's projected inventory of a particular item is sold within the first week of the month, the supplier is automatically notified to deliver additional stock, ensuring that the buying organisation has sufficient supply to meet customer demands, while simultaneously boosting its own revenue. Business intelligence tools can also be used to track supplier performance against business objectives, other than just price. Monitoring performance is an important step in improving supplier relationships, however according to a study by Aberdeen Group, only about half of enterprises have formal procedures in place to measure performance. Aberdeen analyst, Mark Vigoroso, says that without measurement procedures in place, companies have no way of knowing if money and effort spent on supply chain planning is doing any good. Finally, a culture of collaboration must be fostered across the supply chain, and suppliers viewed as a source of competitive advantage, rather than cost. Gartner notes that properly managed supplier relationships 'can contribute to enterprise innovation and growth', while a poorly managed supply base 'will drive up costs and slow new product initiatives'. An integrated, connected supply chain can help lower costs, as manufacturers and suppliers are able set joint production, inventory and fulfilment schedules against real- time market data. A modular approach can be taken to an SRM project, starting, for example, with a critical supplier-facing function such as procurement or sourcing. UK retailer Littlewoods plc