Strategic sourcing – Deloitte best-

practices approach
Tomi Šefman
Head of Management Consulting
Deloitte d.o.o.

17. maj 2007

The Procurement Process

Procurement consists of cycles of sourcing and buying transactions, which

depend on each other

Money
Moneyon
onthe
theTable
Table
• • Identify
Identifyaaneed
needand
andnegotiate
negotiate
and
andmanage
managecontracts
contracts Money
Moneyininthe
theBank
Bank
• • New
Newororbetter
bettercontract
contractcreates
creates • • Items
Itemsare
arepurchased
purchasedbased
basedonon
the
theopportunity
opportunitytotosave
savemoney
money existing
existingcontracts
contracts
2
 Strategic Sourcing is a collaborative and systematic process

The goal is to simultaneously:

1 Reducing total cost of materials and services for an organisation while increasing
quality and service

2 Leveraging internal expenditures while rationalising the supply base

3 Optimising the internal and external supply chain while managing inventory levels
on a commodity by commodity basis (not “one size” strategy fits all)

4 Improving organisational awareness of the “Total Cost of Ownership” while

reducing excessive levels of requisitioning and complexity

5 Building the organisation’s competitive position through continuous improvement

and supplier added-value

3
Strategic Sourcing addresses the “Total Cost” of products and
services that a company procures

Perceived
Purchase
Opportunity
Price

Demand Drivers Actual

Opportunity
Internal Policies & Procedures
Specifications
Procurement Practices
Internal Processes

Management Systems Inventory Practices

Retirement Practices Operational Practices

4
 Sourcing & Procurement Value Proposition

Procurement improvements may offer a less disruptive, more effective opportunity to

impact the bottom line.

Four Methods to Increase Pretax Income by 25% *

Reducing total costs
20%
through more effective
Reduce
Procurement Reduce Labor Reduce Other +24%** procurement may …
10%
Costs Costs Costs  require less effort and
0%
expense than increasing
% Change Required

-9% Increase Sales

-10% sales through traditional
-27%
-20% methods

-30%
 be more sustainable due
-65%
to new contract
-40% agreements
-50%  be less disruptive than
-60% reducing headcount
-70%

* Based on the following estimate of costs, as a percentage of revenue: 55% manufacturing materials & services; 18% labor; 7.5% other costs
** Assumes a 20% gross contribution margin
5
Significant opportunities have been identified in most
industries

Enterprises often derive significant savings from making small

improvements in supplier-facing processes and spend management.

Purchases $ % of Current profit Approximate change

Industry (year 2001)
sales average %of sales in profitability*
Aerospace/defense 40.77 2.45 16%
Beverage 42.39 9.35 5%
Chemical 49.47 4.16 12%
Electronics 56.14 3.78 14%
Engineering/construction 51.03 14.30 3%
Mining 47.26 8.25 6%
Petroleum 26.20 5.56 4%
Pharmaceutical 34.76 17.54 2%
Semiconductor 48.34 -0.99 51%
Telecommunication service 40.46 1.44 28%
Transportation 31.81 1.73 18%
Utilities 22.13 5.53 4%

*Profitability Impact Based on 1-Percent Reduction in Expenditures

Source: Gartner - Supplier Relationship Management Pushes Profitability in Dealing With Suppliers - 9/02
6
 Strategic Sourcing delivers greater value than traditional
purchasing approaches

Category Example of Strategic Sourcing vs. Traditional Purchasing Deli

ve
E x a ra bl e
mpl
Sources of Savings e

Example: Commercial Printing ($7MM in Annual Savings Realized)

Plant level analysis of
Show tradeoffs of vendor margins and volume
using unbranded commitments for large jobs
paper, lower basis
weights, fewer 7% 27%
colours, etc.

Lacking a Eliminate "extra"

comprehensive price
Strategic charges and cherry 5%
tracking system, most pick components
Sourcing vendors will find ways
• strategic focus to charge more than
negotiated rates 5%
• microeconomic
levers
7% -4% 4%
Traditional Eliminating
6%
purchasing agency
• tactical focus 3% directed work,
• traditional techniques brokers, etc.
Volume "Tough" Compliance Typical Elimination Unbundling Demand Vendor World
Consolidation Vendor Issues Purchasing of Low-Value Price Management Margin Class
Negotiations Result Intermediaries Analysis Sourcing
Result 7
 World Class Procurement can be defined using the following
seven dimensions
Procurement Strategy:
How procurement strategy is linked into overall corporate
strategy

Supplier Strategic Sourcing:

Management The systematic method by which products and suppliers are
sourced
Information Strategic
Management Sourcing Procurement Process:
How the daily purchasing activities occur

Supplier Management:
How suppliers are managed, relationships created, and
communications coordinated

Procurement Organisation
Information Management:
Strategy and HR How IT and eProcurement tools are used to simplify and
improve the overall process

Performance Purchasing Organisation:

Management Process How procurement is organised, resourced and trained

Performance Management:
How performance is measured and tracked

Supporting material on the progression towards “World Class Procurement” can be supplied against each dimension
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 Cross functional teams therefore need to be employed
to maximise benefit

Traditional Approach Strategic Sourcing Approach

Engineer
CROSS-FUNCTIONAL
SOURCING TEAM
Purchasing End
Purchasing Engineer ++ Agent + Users
Agent
Finance Marketing

Logistics Info. Mgmt.

Material
Officer

Characterised by: Characterised by:

 Functional Responsibilities  Joint Responsibilities

 No Common Focus  Enhanced Communications
 Lengthy Cycle Time  Consistent Supplier Interface
 Short Cycle Time
9
 The maturity of a procurement organisation can be
defined using the model below
- Strategy fully supports the corporate goals and driven by corporate consensus
- Managing the supply risk while leveraging the competitive strengths
- Nurturing supplier relationships Stage 5:
- Supplier base share improvement target for cost and innovation added value
- Full visibility and trust across the external value chain Pioneering
- Procurement maintains a rationalised supplier network that delivers
technology, knowledge, products or service quality superior to competitors World Class
Procurement
- Procurement strategy aligned to corporate strategy
- Suppliers selected for strategic fit and deliver continuous improvement
- Data driven decision making
Level of Added Value

- Full support over purchasing cycle

- Risk sharing higher with the organisations co-located and jointly Stage 4: High Performing
financed Alliance
- Business planning optimises all commercial aspects, tax, investment,
people
- Formal Planning processes
Stage 3: - Focus on Supplier Relationship Management and sharing
business plans
Advancing - Longer term, bigger value contracts with fewer suppliers
Partnership
- Collaboration on cost improvement, increased levels of risk
sharing
- Trained and qualified resources supporting all categories of spend
- Key Performance Indicators in place.
Stage 2: Developing
- Some category strategy creation, but not company wide, and not communicated
Purchasing effectively
- Volume leverage through effective use of competition across categories
- Track commercial measure of performance, targets for savings
Stage 1: - Technology enables i.e. purchase to pay cycle improvement through automation
- Selected supplier base consolidation
Reacting - Training and recognition of skills required
- Needs not anticipated, data not available or not used
Buying - No organisation wide procurement strategy, large supplier base
- Transactional focus
- Procurement provides ad-hoc tactical support
- Low skills and resource, little career planning Time Line 3-5 Years
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 Deloitte Consulting’s six-step methodology

1 2 3 4 5 6
Diagnose

Opportunity Assess Assess Develop Implement

Assess Internal Institutionalise
Supply Sourcing Sourcing
Opportunity Supply Strategy
Market Strategy Strategy
Design Chain
Program

Key Change Leadership fundamentals are necessary throughout implementation of the

methodology to ensure successful results

 Develop vision and strategy  Redesign infrastructure

CHANGE LEADERSHIP
 Enroll stakeholders  Measure performance
 Communicate vision and strategy  Develop new values, skills, and behaviours

11

Assessing the Opportunity
1 Actions
eess ity
s n
Ass orrtu
p
Op • Develop team charter
• Identify stakeholders
• Document size of buy
• Document inventory
• Stratify the buy
• Communicate team scope
1 2 3 4 5 6
Assess Opportunity
Outcomes
• Team Charter
• Current stakeholders
• Overview of external
spending/related costs
• Identification of specific
sourcing opportunities and
issues
• Initial Sourcing Team
Communication Plan
• Stakeholder buy-in to program
scope and opportunities
12
 1 2 3 4 5 6

The data collected can lead the Strategic Sourcing Assess Opportunity

Team to identify “Quick Hits”

• Quick Hits are the “Low hanging fruit”

and can provide:
 Instant savings to the company
 Credibility to the work of the team
 Building support for further activity

Early on in the process, opportunities may arise that can be

acted upon by the Sourcing Team, or a separate initiative to
capture cost and process savings right away.
13

Assess the Internal Supply Chain
2 I
r n
n te i n
al
s
es Cha
s
As pply Actions
Su
• Identify demand drivers
• Perform specification review
• Perform specification gap analysis
• Perform specification standardization review
• Perform supplier specification review
• Identify all related Total Cost activities
• Map current process steps
• Evaluate effectiveness of the current process
• Determine Total Cost of Process
• Benchmark Total Cost process
• Identify process opportunities
1 2 3 4 5 6
Assess Internal
Supply Chain
Outcomes
• List of customer expectations and
requirements
• List of current and future internal
product and service requirements
• List of successful practices being
used outside the enterprise
• Detailed specifications review
• Initial supplier interfaces that
begin supplier selection process
• Detailed process map of the
internal supply chain process
• Total Cost analysis
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 1 2 3 4 5 6

Assess Internal

Tips for process mapping Supply Chain

When analysing process maps, look for rework, redundant activities, excessive work
process handoffs and corrective actions as areas for improvement.
MANUFACTURING STOCKROOM PURCHASING SUPPLIER PAYABLES
Requesting

Identify In Mapping Tips:

need Stock?

No • Always map process as it actually occurs,

not as it should occur
Ordering
Place

Yes
Order
• Utilise direct observation when possible

•
Receive Receive
order copy
There may be several maps to account for
Receiving
variations by location, commodity, etc.
Receive Deliver
product product
• You will often encounter subprocesses within
Send
invoice
Receive
invoice
larger processes

Disposition
• The flowchart should be understandable to
Use
product
Pay
invoice
non-users of the process.
Receive
payment

Note: Actual process maps are completed in greater detail. 15

 1 2 3 4 5 6

Assess Supply

Step 3 - Assess the Supply Markets Market

3 s
s
ees s rkkett
Ass M M a
pply
p
Suu Actions Outcomes
• Identify potential sources of • List of successful
supply procurement practices being
• Evaluate industry(ies) used outside the enterprise
• Identify viable sources of
• List of viable suppliers
supply
• Perform supplier • Initial supplier assessment
assessments and comparative analysis
• Perform supplier • List best performing
comparisons
suppliers
• Identify supplier
opportunities
16
 Some key tools for supplier market evaluation

• Five forces model • Supplier Value Chain analysis

 Useful for understanding relative  Useful for understanding supplier
bargaining power in a category position and potential savings levels
 Who sets the price – you or your  Sources of data include suppliers,
supplier? public financial data, industry reports,
etc.
Potential
Potential
Entrants
Entrants Supplier Value Chain Analysis:
Example: Distributor Cost Breakdown

Gross Margin £0.14

Industry
Industry
Competitiveness Sales and Marketing £0.19
Competitiveness
Suppliers
Suppliers Customers
Customers
Purchase Price £1.22
Intensity
IntensityofofRivalry
RivalryAmong
Among
Existing Firms
Existing Firms £0 £0.50 £1.00 £1.50

Overhead £0.09
Substitutes
Substitutes
Retail Price £1.64

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 1 2 3 4 5 6

Developing

Step 4 - Develop Sourcing Strategy Sourcing Strategy

4 gg teggy
i n
pp Sttraa
e l o
ve g Actions Outcomes
De rccin g
u
So
 Reconfirm scope  Finalised scope of work
 Determine desired outcomes statement
 Compile opportunities
 Enhanced internal supply
chain process strategy
 Brainstorm process enhancement
and supply strategies
 Sourcing strategy to meet
objectives and desired
 Test process strategies and outcomes
solutions
 Understanding of how internal
 Test supply strategies and stakeholders will be impacted
solutions
 Management approval of
 Draft an action plan process enhancement and
 Communicate strategies supply strategies
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 1 2 3 4 5 6

Developing

Spectrum of Procurement Strategies Sourcing

Strategy

Ease of
Less difficult Implementation More difficult

Demand
Demand Product
Product
Volume
Volume Best
BestPrice
Price Joint
JointProcess
Process Relationship
Relationship
Management
Management Global
GlobalSourcing
Sourcing Specification
Specification
Concentration
Concentration Evaluation
Evaluation Improvement
Improvement Restructuring
Restructuring
Actions
Actions Improvement
Improvement

Consolidation of Policy Disciplined Expansion of Changing the Use of Structuring of

purchased changes that process for supplier base relative market supplier/ long-term
volume to reduce aggressively on a broader, complexity of customer supplier/
increase demand for renegotiating all sometimes an item teams to customer
negotiation the product/ or selected international through reengineer key partnerships or
leverage service or supplier prices, scale standardiza- supplier alliances to
(materials substitute contracts and tion, processes, achieve
and business lower price agreements substitution or joint processes integrated new
units) product/ based on value and the supply approaches to
service competitive engineering chain for the business
bidding or other mutual
techniques advantage and
cost reduction

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 Methods for defining the sourcing strategy

This sourcing strategy defines both the commercial relationships with the supply base
and the internal supply management processes

Sourcing Strategy

Supplier strategy Supply management process

Commercial relationship Internal procedures

Centralise Cross
Leverage Partner
High

High
execution Functional
Strategic importance
Strategic importance

De-
Buy Manage
Low
centralise Simplify
Low

Market risk
ordering
Low High Low High
Difficulty of obtaining supply Complexity of the buy
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 1 2 3 4 5 6

Implement

Step 5 - Implement Sourcing Strategy Sourcing Strategy

5 y
t egg
een ttrrat
p
m
llee ngg SS Actions Outcomes
m ur c i
IIm i n
SSo  Develop supplier solicitation  Selection criteria and weightings
for supplier selection
strategy
 Request for Proposal (RFP) to
 Implement supplier solicitation suppliers
strategy  Short list of suppliers
 Conduct supplier negotiation  Comprehensive evaluation of
 Develop process enhancement short-listed suppliers
strategy  Performance measure categories
for supplier performance analysis
 Obtain final approvals
 Final selection of supplier(s)
 Award contract  Finalised Standard Agreement,
with negotiated pricing and terms
 Communication to all affected
stakeholders
21
 1 2 3 4 5 6

A list of key criteria and associated weights is required to Implement

Sourcing Strategy

assess the potential suppliers

The negotiating strategy will help form a list of key criteria and associated weights to
assess the potential suppliers

Weighting
Topics Addressed Issues Addressed
Factor

 3rd party certification

 Evaluation of preventative maint.
Quality 35%  Evaluation of quality assurance
procedures
 Inventory management
Service 20%  Electronic interface capabilities
 Value-added services

 Order cycle-time
Delivery 15%  Rush order procedures

 Price
Cost 30%  Discounts

Total 100% 22
 1 2 3 4 5 6

Based on market analysis and the supplier information Implement

Sourcing

collected, develop negotiation tactics for each supplier Strategy

Bottleneck Items Strategic Items

1  Strategic inventory  Collaboration/partnership
2  Focused management  Best practice
 Move to strategic  Exploit mutual dependency
3
 Collaborate

Number of 4
Suppliers Non-Critical Items Leverage Items
5
 Standard  Establish vendor rating
6 products/commodities criteria
.  Monitor order volumes  Competitive bidding
 Spot market
.
20

0 5 10 50
% of Supplier’s Turnover
23
 1 2 3 4 5 6

Institutionalize

Step 6 - Institutionalise Sourcing Strategy Sourcing Strategy

6 li se ggyy
i
i t
t
i
i o
uut g SSt
t
a
nna raateeActions Outcomes
t
t g
IInss urrciinn
SSo
 Transition to new process  Implementation of new
 Develop supplier relationships processes

 Implement operational  Transition to the new

changes supplier(s)

 Establish joint  New supplier relationship(s)

supplier/Enterprise process focused on jointly achieving
improvement team Total Quality

 Monitor and report savings  Jointly developed process

improvement and ongoing
 Monitor and report quality supplier relations
performance
 Measures for internal
compliance and track benefits
24
 Sample Stratification Criteria

Two key criteria determine a Supplier’s position within the Stratification: Market
Complexity and Strategic Importance.
Stratification Framework
inflexibility to switch suppliers)
(product/service uniqueness,

Level 1
Core
Partner
Market Complexity

Strategic
Level 2 Partner

Level 3 Supplier

Strategic Importance
of Product or Service

25
Importance of Team Work

26
Wrap-up

1. Think strategically

2. Measure Total Cost

3. Work as a Team

27
Contact information

tsefman@deloitte.com

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