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MATERIAL SOURCING STRATEGIES
Critical Aspects to Future Success of Supply Management Organizations | Special Report
aquamcg. information. operating goods and services for a large manufacturing entity buys more than 300 unique categories from more than 10.NEED FOR DEVELOPING CATEGORY A typical purchaser of raw materials. which can be done by asking and answering the following key questions: o Are expenditures in the category large enough to create buyer power. goals and measures and external alignments. the role of the sourcing function is to link the company's business needs with the capabilities of external suppliers. goals and measures and external alignments. Intuitively. MRO supplies and janitorial. Research on extant literature and gleanings from on-ground experience across sourcing professionals in the country reveal the following aspects critical to future success of supply management organizations: ONE SOURCING STRATEGY DOES NOT FIT ALL. corrugated packaging. it would be easy for a sourcing professional to envision the need for a wide variety of sourcing strategies for categories that possess characteristics that vary as widely as life insurance. people.and the perspectives and approaches of these two worlds can be very different.It is not good enough to get “two colours right” while disrupting the “rest of the cube. and functions.” MATERIAL SOURCING AND BUYING STRATEGIES The strategies for effective sourcing simultaneously balance design elements of structure. projects. Key characteristics of different category types need to be analysed and understood on a category-by-category basis. For this linkage to provide real value supply must be able to interface with two very different worlds—the external world of the marketplace and suppliers and the internal world of business units.000 unique suppliers.com .Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES MATERIAL SOURCING AND BUYING STRATEGIES Critical Aspects to Future Success of Supply Management Organizations INTRODUCTION Being a ‘boundary function’. relative to suppliers and other buyers (or large enough to make a sourcing impact)? Page 2 AQUA MCG LEADERSHIP REVIEW | www. people. Solving the Rubik’s Cube provides a strong analogy to implementing an effective sourcing strategy. Research on extant literature and gleanings from on-ground experience across sourcing professionals in the country reveal the following aspects critical to future success of supply management organizations: STRATEGIES FOR EFFECTIVE SOURCING The strategies for effective sourcing simultaneously balance design elements of structure. information.
Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES o o o Is the category strategic/proprietary to the buyer? Are there any current or future risks of supply continuity? Does the sourcing/procurement department own/control sourcing decisions and supplier management or is the sourcing/procurement department an “influencer?” Does the souring/procurement department have professional knowledge of the category and sourcing best practices in the category? Does the sourcing/procurement department fully understand the supply market cost and pricing models and structures? Is the expenditure and the specs/volumes in the category recurring/repeatable or project based? How complex/fragmented are the purchases in the category (sku’s. lanes.)? Are the supply markets consolidated and duopolistic / monopolistic in nature or fragmented and extremely competitive? Is the supply base local. etc. tariffs. national or multi-national? Are the products/services purchased easily substitutable and not differentiated (commodity-like)? Who are the internal users/stakeholders associated with the category and what is their historical exposure to sourcing activities and different sourcing approaches? What is the current state of sourcing strategy for the category in terms of number of suppliers (w/ and w/o contracts) and the fragmentation level of suppliers and the dollars expended with the suppliers? What are the switching costs and how will the supply base view them? What other internal goals and objectives may exist beyond typical sourcing objectives (such as building new customer relationships with entities who are also suppliers or diversity expenditure hurdle rates)? o o o o o o o o o Figure 1: Different sourcing needs basis material category Decision Criteria: 1) Purchase Volume 2) Business/ Site 3) Supplier 4) Usage Commonality Commonality Mix Across Categories Procurement Coordination Needs High Example Buying Structure • Central buyer Even Distribution Across Users Even Distribution Across Users Majority Users Example Geographic Sourcing Market • Global Common Suppliers Multi Users Increasing Coordination Requirements • Central buyer • Global/Region Unique Suppliers • Lead business buyer with network to other buyers Majority Users Large Single Users Common Suppliers • Lead business buyer Category of Materials or Services Small • Business buyer with network to other buyers • Business buyer • Business buyer • Local • Local Unique Suppliers Low V ALUE B ASED SOURCING Page 3 . service level types. specifications. drawings. prints.
com . market equations (dependency on a few large global manufacturers to a broad supplier base. One key tool to such holistic analysis of supply needs is the total-cost approach. futureoriented role. after assessing total costs for manufacture.aquamcg. Companies excelling in category management as detailed above will. embedding the supply function’s role more holistically in the company’s supply chain. In other cases. Monczka (“Supply Management in the Decade Ahead”) companies will increasingly use value-based sourcing for higher business impact. especially in case of indirect spend categories but also Page 4 AQUA MCG LEADERSHIP REVIEW | www. two areas of focus are highlighted below: Source Base: Twin forces at work determine the source base for a category. MANAGING SUPPLIER B ASE & SUPPLIER RELATIONS BETTER Improving the overall supply base and increasing the value achieved from it is critical to supply’s value proposition.Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES In companies blazing the trail in supply management. in future. ensuring input price control which the company can then translate into price-point based marketing techniques. thereby changing its supply material (pure to scrap). the company has locked input PET resin prices for its converters. or even the market that supplies it. as highlighted by Robert Z. The best companies are instead broadening their procurement horizons and focusing on the item’s basic functionality and then searching for alternatives. For example. especially once more and more categories come under the purview of central procurement and with reduction of maverick spend. not limit their thinking to the current form an item takes. The outcome of such an approach leads to decisions for example on ‘make-vs-buy decisions’. a leading beverage manufacturer has over the years shifted from buying caps and closures at market prices to working collaboratively with its suppliers to backward integrate their raw material supply. In future. Consolidation is expected to decrease the source base for companies. a leading Indian stainless steel manufacturer has shifted from sourcing pure Nickel (a key input material) to stainless-steel scrap as a Nickel source. While literature is replete with details & case studies. companies focus on upstreaming to lock value. thereby increasing its negotiation power). For example. Leveraging global scale. sourcing is increasingly taking on a more strategic.
where it resides. and service requirements and ensuring responsiveness. Commit enough people to do the job. by determining whether a particular supplier is expected to provide the lowest possible price or to take on a value-based role by contributing through technological advancements and other innovations. LEVERAGING INFORMATION AND T ECHNOLOGY ENABLERS AS KEY DIFFERENTIATORS For the supply function. but also preferential access and business partnership development. Not heeding one or more can mean the difference between a business combination that succeeds with the hoped-for synergy and one that limps along at less than its full power to realize anticipated benefits. Balance the benefits among the parties: Each party must believe that the benefits of the relationship are mutual and equitable a win-win situation. Organizational structure needs to consider where information comes from. and explicit mandate from the top of both alliance partners is absolutely essential. 5. communicate: Develop a communications program and ensure that information systems are compatible and equal to the communications expectations. Make rules for governance and decision-making. and all the associated process adjustments are deeply dependent on communication and at the most fundamental level. customers. which need to include elements of not only price. Page 5 . post-alliance integration. and market information (commodity supply and demand and industry and supplier analytics). and align written and unwritten rules 10.web based tools are enabling companies to capture and share operational information across the supply chain to all its partners. Clarify objectives. Internal information like transactional information has been covered adequately through enterprise resource planning systems. visibly and early—A clear. Create a prenuptial agreement. and new product introductions). bringing in new players who not only add competitiveness-led market benefits but also new technology and a willingness to learn. and operations. exception management. 9. and commit the right kinds of people—Strategic sourcing alliances require dedicated talent to provide content knowledge about the science and technology. 2. without information. A critical element in this decision making is a clear articulation of the sourcing functions goals.” Cultural issues underpin virtually all of the recommendations on this list. businesses. while meeting quality. open. don’t go in without a way back out: Defining how each party can get out of an agreement is as important as identifying why to get into it at the start. and to provide leadership competencies. improve and develop capabilities. sourcing professionals will make flawed decisions with catastrophic business results. and purchase orders). leading companies are defining the roles of individual companies more exactinglyfor example. 7. the result can be failure to capture all the benefits of the combination. (See sidebar for ten ways to ensure that your alliance stays healthy and thrives) Ten ways to Ensure Successful Supplier Partnerships 1. communicate. Communicate. and be specific about expectations 4. cultural issues. As the building block of sourcing. There are several different types of information: transactional information (such as specifications. Tend to the cultural issues constantly—Culture is defined as “The way things really are around here. Clearly define processes and specify the ways the parties will work together. Juxtaposed with the phenomenon of consolidation. 8. prices. information is the raw material from which sourcing is fabricated. Align strategic goals—If long-term strategic goals of the parties to a relationship aren’t explicitly aligned at the outset. business management information (volume and cost plans. Get top leadership to commit. information is a critical design element. 3. include performance measures and follow-through 6. strategic alignment. leading companies continuously renew and reinvigorate their supply base. Organizational alignment. where it goes. Given this phenomenon. Relationship Management: Finding supply chain partners & ensuring a healthy alliance requires attention to a short list of commonsensical considerations. and how it is controlled. Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES to an extent on direct categories.
Wider role of technology: Almost in all services. Usage variance and price variance are not tracked separately. import-export laws.aquamcg. customer satisfaction. support training and participation in industry and trade events. In many cases. while providing them with a lot more independence. speed of service. develops and retains the best talent. and even tehsil-wise reports from government cane assessors. ability to get visas on a short notice. Best-in-class companies provide for clear development paths. At the same time it requires a set of soft skills that are absolutely critical to be able to forge effective relationship with the Suppliers while ensuring that the company objectives are delivered – both tangible and intangible. Page 6 AQUA MCG LEADERSHIP REVIEW | www. Most of the accounting systems do not inventorize the consumables and book them as expense on receipt of materials at plants.people having a unique skill-set comprising of technical acumen as well as people skills. 24 hours availability – all parameters evaluated across a large number of people. And if a small to medium sized organization does not have the time and resources for this kind of development program. PROCURING & NURTURING THE R IGHT T ALENT Procurement requires a very strong technical background such as understanding of the product. no inaccuracies in bookings. One has to depend on Customer Surveys for feedback on quality of service Limited flexibility in suppliers: Once we enter into a contract with a particular service provider.this information has served the company in good stead while sitting across and negotiating forward contracts with millers. statutory requirements.Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES Key focus areas in mature sourcing companies is the focus on tracking. and have significant potential for driving efficiencies. even the baseline cost data is not available. cost competitiveness. manufacturing processes. while providing for succession planning. collectively these represent up to 10% of procurement spend on average (and frequently much higher). an FMCG company with a significant direct material spend on a commodity like sugar has a core commodity desk tracking information on industry capacities and inventories. A good example is Mobile Phones – it is quite expensive to change the service provider just for a few users. A few salient aspects of this category: Usage and Rate are typically mixed: For Consumables as well as services. For example. then it makes sense to hire trained resources from the bigger companies – may be at a little higher costs. Hence it is critical that a company attracts. This aspect becomes an important criterion for supplier evaluation. get the best discounts in the market. not possible to record all data. sugarcane recovery. and provide clear career paths and rotation plans. which should track contract compliance. it is difficult and costly to move to another service provider for a short duration or a smaller business. apart from index-tracking. people talk of total spends more than the per-unit cost. ability to change bookings on a short notice. daily auction prices. technology is changing fast and hence the service provider has to be in touch with the latest technological developments. analyzing and using market information.com . FOCUS ON INDIRECT MATERIALS AND SERVICES Although indirect materials and services for a typical manufacturing entity are individually small areas of spend. financial analysis. Large number of quality attributes for service: For a service such as Travel there can be multiple attributes of quality viz. with effective performance management & KPIs. continuous improvement programs as well as requisition turn-around times. Effective spend management in this category depends more on monitoring than other aspects discussed till now.
Plan for indirect items & expenses as well.5% of revenue is still uncovered by Procurement.not only direct items. audit and regularly validate procurement savings Design Aspects: o o o o o o o o o Procurement’s impact on strategic vision. Trade Financing. track % unplanned / unstructured buying Track actual vs. Payment Terms to be part of Procurement savings goals o o Focus on all items & services. expense. (On an average 18. business plan and key financial metrics need continual focus Analysis of current costs (direct. preferably multi-year Procurement Plan to project. savings targets and benefit goals 3-5 years buying strategy for each material Actions to measure key supplier relations Touch-points with other business initiatives Assigned business. o o Effective Contract Management Design Aspects: o o o Create Contract based on Bid Awards Share Contracts internally & externally to obtain necessary approvals Publish Contracts to Backend system Page 7 . finance and procurement resources A time phased savings plan Cash flow elements such as Working Capital. Volume Leveraging – Concept applies not just to big ticket items but in other categories also. Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES TOOLS TO ‘OPERATIONALIZE ’ S OURCING STRATEGIES The key to strategic sourcing is to integrate sourcing with procurement through analytics and contract management. per an Aberdeen Research report) Design Aspects: o o o o Minimize maverick buying. capital) and cash flow forecast Prioritized listing of key spend categories. MRO items. eg. Expense Automation System – Instituting a system and periodic expenses analysis can deliver 67% savings. The following design tools are key enablers in ensuring the same: o o Formal.
expiry. innovation. flexibility) Page 8 AQUA MCG LEADERSHIP REVIEW | www. market. and compliance There is 20 – 25% leakage in savings due to poor compliance of contracts.Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES o Monitor consumption. competition & imports Cost targets to flow out of competitive value chains Balanced focus on Cost & Supplier Capability (quality. Quantity & Timeliness of deliveries Trade financing options & payment terms Purchase Cycle Time Ownership of material price variance by Procurement Performance tracking against last year.aquamcg. according to some leading sourcing experts o o Better Analytics Capability Design Aspects: o o o o o o o o Supplier Performance Measurement and Contracts based on data-based performance measures Suppliers’ SWOT Analysis Total Cost Analysis Capture Supplier’s Cost Structure Multi-attribute decision making models and what-if scenarios Competitive Benchmarking Efficient Buying Tools : E-Auction & E-RFP/Q Design Aspects: o o o o o Share RFPs for internal approvals Distribute RFQs to existing & potential suppliers Train suppliers on RFx / E-Auction Conduct the Auction & Share Results Track entire process with graphical display o o Procurement Performance Scorecard Design Aspects/ Key Variables: o o o o o o o o o o Material Price Variance # Stock Outs Lot Sizes & Lead Times Supplier Reliability on Quality.com . service.
incorporating and internalizing above highlighted aspects takes the spend management function along the road to procurement maturity. only 34% finally go into P&L while what is reported by procurement at the beginning of the year is as high as 75% . It leads to an estimated leakage of 30-40% in savings. How mature is your organization? Organizations can judge where they are on this road using the following diagram: Page 9 . out of total possible savings.As per an Aberdeen group research conducted in 2006. Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES There is a strong need for Standard definition & tracking of Savings across the organization.80% FOUR STAGES OF PROCUREMENT MATURITY Imbibing.
com . Visit us at: www.com Or contact us through our website: Click Here About Aqua Management Consulting Group Aqua Management Consulting Group (Aqua MCG) is a premier advisory and execution group committed to delivering superior supply chains and maximizing business value for our clients. We do this by providing High value consulting advice and complete execution support Business and functional leadership.aquamcg.com anshuman. analytical rigor and defined metrics to deliver value for every project we undertake. good domain knowledge and execution firstname.lastname@example.org shiv.aquamcg.singh@aquamcg. on a BOT model Supply chain outsourcing solutions and services Steady-state operations monitoring & continuous performance improvement Our team comprises professionals with strong consulting experience.com manishkumar. We help transform and manage supply chains for better business email@example.com Page 10 AQUA MCG LEADERSHIP REVIEW | firstname.lastname@example.org@aquamcg. We use structured methodologies.com gopal.Aqua MCG Special Report MATERIAL SOURCING AND BUYING STRATEGIES For more information. please contact: Mumbai: Ram Mantravadi Shiv Kumar Bengaluru: Gopal Anandan Manish K Singh Technology: Anshuman Mukherjee ram. Our vision is to be globally recognized as highly valued partners for achieving supply chain leadership.
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