Presentation on theme: "Strategic Supplier Relationships New Strategies for Changing Times"— Presentation transcript:
1 Strategic Supplier Relationships New Strategies for Changing Times ISM Chemical GroupLas Vegas, Nevada2006
2 Agenda Background New Approaches for Strategic Supplier Relationships Trends in Strategic Supplier RelationshipsCharacteristics of Strategic Supplier RelationshipsSelection CriteriaNew Approaches for Strategic Supplier RelationshipsReal-Life Management of Strategic RelationshipsHow This is Different From Other ApproachesChallengesQ&A
4 About Denali Consulting and SupplyStaff Management consultancy, formed in 1996Focus is exclusively in Supply Chain Management consultingPrimary industries include service based and capital-intensive clientsElectric & Gas UtilitiesFinancial InstitutionsOil & GasMiningServices includeStrategic Sourcing & Procurement ImprovementLogistics OptimizationSupply Chain Strategy & AssessmentOrganizational Development & DesignSupply Chain Staff Augmentation and Search / RecruitingTypical positions include:Sourcing & Logistics AnalystsSourcing & Logistics ManagersSupply Chain Directors & V.P.’sOffer temp-to-perm conversions at no extra cost after 6 monthsSince Supply Chain Management is our only focus, we are experts at finding the best talent for today’s Supply Chain organizationsProvide payroll, benefits, HR services for all resourcesDenali Consulting and Supply Staff are certified as woman-owned businesses by WBENC
5 Sample of client engagements that are used to create the basis of this presentation Lucas Aerospace
6 Denali Commodity Expertise Across Many Commodity / Service Categories Partial Listing of Commodities & Services Sourced by DenaliTransformersBuild-Up TrucksWire & CableChemicalsGasesFacility Design & ConstructionVegetation Management/Line ClearingMetersJanitorial ServicesTurbines & GeneratorsAutomated MeteringMROPlant and Facility MaintenanceTravel Related ServicesComputers & Desktop ServicesBenefits ManagementPipeline MaintenanceInjection Molded PartsPole ReplacementCastingsDrug & Alcohol TestingFuel & LubricantsDrilling EquipmentRotorsMotors & GeneratorsSupplemental PersonnelBoilersSwitchgearLine HardwareApplication Development ServicesEngineering ServicesOffice Products & FurniturePrinting & Reproduction ServicesFreight & LogisticsUnderground ConstructionPackagingCircuit BreakersConstruction Services
8 What Is A Strategic Supplier Relationship? Strategic Supplier Relationships Definition:A supply strategy based upon joint opportunities, mutual trust, respect and open & honest communication between the supplier and the customer.This strategy is focused on reducing related supply chain costs and improves the quality of goods and services.
9 Once Again a Procurement “Best Practice” Beginning of Volatile Commodities MarketsHighEmergence of eSourcing tools & eMarketplacesIntroduction of Strategic Sourcing & Strategic AlliancesIndustry Consolidation WavesPerceived Importance of Strategic Supplier RelationshipsLow
10 Why are Strategic Supplier Relationships More Important Now Than Ever? Volatile MarketsPrice-focused sourcing strategies don’t work in periods of increasing commodity pricesMore sophisticated relationship-based approaches are required to meet utility cost reduction targetsBased on recent increases in raw material, especially fuel, traditional unit based savings will not generate substantial savings, suppliers must be willing to provide creative solutions to remove costs from how they service or re-engineer the procured materialsMerger & Acquisition TrendsLarger, national/global presences of utilities require more strategic supplier relationships to support growth and cost synergy targetsExpansion of Supplier Value-Added ServicesSuppliers continue to expand their value-added services offerings, increasing the value of strategic supplier relationshipsOutsourcing
11 Strategic Relationship Characteristics Types of Goods & ServicesHigh $ SpendCritical business implicationsCustom engineeredLimited availability or alternativesBuying ConsiderationsTrust is a major issueCross-functional involvementHighly resource intensiveLong range planning requirede.g. Line Construction Services, TransformersCompetitive Advantage DrivenSupplier RelationsLonger Term AgreementsTotal interactionClose working relationshipAligned objectives and philosophyTeamwork
13 Elements Of Successful Supplier Relationships Six critical elements support the development of successful relationships with Key Suppliers:Focus A common vision for the relationship, with agreedstrategies and activitiesTrust Open communication and disclosure of businessdriversPerformance Continuous improvement towards agreed targets andKPIsPeople Clearly defined roles and responsibilitiesProactive Anticipating business needs and providing creative solutionsProfit at Risk Establishing real metrics to drive behaviour for both parties
14 FocusA common vision for the relationship, with agreed strategies and activitiesA Team of representatives from the Buying Company and the Supplier jointlydevelop a Business Plan for the Relationship, addressing:Vision and MissionDrivers and ValuesBreakthrough StrategiesContinuous Improvement StrategiesKey Activities for the Period of the PlanKey Measures of Success
15 Trust Open communication and disclosure of business drivers Development of Total Cost of Ownership Model to understand our joint supply chain costs‘Open Book’ arrangement for Contract Cost Drivers and required marginsMore use of incentives to create business drivers for suppliers to provide R&D support…for cost savings or driving new revenue avenues
16 Performance Continuous improvement towards agreed goals Establish Continuous Improvement Program toGenerate and document opportunities for valueadding and process improvementImplement ideasDocument benefits achievedDevelop KPIs to quantify progress againstKey Measure of Success identified in theBusiness PlanCustomer specific measuresJointly review progress on a regular basis
18 People Clearly defined roles and responsibilities Customer Supplier Category Manager/Lead BuyerManages the performance of the contract and supplier across the organizationCustomer RepresentativeResponsible for the applicationof contract to a specific customer groupSupplier Development TeamRepresentatives of major customer groups who the determine strategy for the category and monitor supplier performance against KPIsSupplierAccount ManagerResponsible for provision of goods or services under Terms of Contract/Agreement. Customer Contract Manager and decision maker.Operations ManagerResponsible for the application of contract and improvement program, working directly with the customer
19 Proactive Customer & Supplier Quick responsiveness in sharing ideas Risk taking behaviour rewarded and encouragedNew ideas move through system of approval on fast track
20 Profit at Risk Bottom-Line Impact Performance to agreed upon targets is expected-not rewardedInsist that suppliers proactively know their market for raw materials, technological advances, industry best practices
21 New Approaches to Strategic Supplier Relationships
22 Typical Supplier Development Process ContractStart-upPlanning andImplementationSupplierRelationshipManagementContract andPerformanceManagementValueDiscoveryReview and DefineCategory StrategyDevelop DetailedTransition PlanDevelop CommunicationApproachManage Contract andSupplier PerformanceConduct Internal andExternal AssessmentDevelop SupplierRelationshipsConductImplementationPerform RelationshipCheck-UpsManage ContractVariationsDevelop Options andRecommendationsManage StakeholderCommunicationsPlan CompetitivenessAssessmentReview CategoryPerformanceObtain StakeholderApprovalManageContract EndCreate Total CostModel (if not alreadyin place)Conduct ValueAnalysis Workshop (s)
23 What’s New With Strategic Supplier Relationships New approaches are being required to deal with new environmental factors in the supply chainVolatileMarketsBroaderSupplierOfferingsIndustryConsolidationNew Approachesto SupplierRelationships
24 Volatile Markets Require Greater Cost Modelling Sophistication Volatile markets are tough for both customers and suppliers.Unless cost transparency is achieved in the relationship and pricing structure, larger contingencies will be built into prices.Working closely with your core strategic suppliers is the best means to continue realizing ongoing savings through volatile markets.Understand how to approach suppliers’ price increase requests critically but fairly. Share cost increases with suppliers who do a good job of managing their cost by collaboratively working with their suppliers and demonstrating good supply chain management.Better understand the costs of your purchases and what market forces are effecting them. In times of volatile markets, it’s more important than ever to have an in-depth understanding of supplier cost structures and total supply chain costs.Proactively work to ensure that the pricing structure of your contracts are appropriately motivating suppliers to decrease cost while maintaining or increasing quality and service.
25 Total Cost of Ownership The present value of all costs associated with a product, service, or capital equipment that are incurred throughout the supply chain.Typically these are broken into 4 categories:Purchase priceAcquisition costsUsage costsEnd of life costs
26 Where do we get the benefits? Across a Company’s boundaries:PerceivedOpportunity$$Purchase PriceProcurement PracticesSupplier Best PracticesLeverageSupplier R&D LeverageSpecificationsInventory PracticesService Measures trackingTransactional ProcessRemnant/Obsolete PracticesActualOpportunity
27 Total ownership costing of the supply chain Identify Need Procurement Distribution Warehousing DisposalSpecification Receiving Application Out-of-Service“Cradle to Grave” CostingIn purchasing, “total cost” generally includes the purchase cost of item being purchased, plus the following; transportation, indirect handling, inspection, quality, rework, maintenance, incremental operations and all other “follow-up” costs associated with the purchase.This may also be referred to as the “cradle to grave” or “womb to tomb” costs. It looks at the commodity or service as it moves through the supply chain from initial identification of a need until the final disposal or retirement.Analysis of the supply chain is done using a concept called Activity Based Costing
28 Example of Total Cost Comparisons This is an example of an actual team…I won’t tell you the commodity, but it is represented by one of the suppliers in this room.
29 Strategic Supplier Relationships in M&A Environment As companies continue to consolidate, strategic supplier relationships can play a critical role to support growth and cost management targets(Hot issue - Maintaining supplier diversity goals, while consolidating the supply base)Supply chain synergiesare often key elementsof M&A business casesBroader territorieswill require stronger, morestrategic relationshipsStrategic suppliers canbe key members ofan M&A joint teamSophisticated costmodelling is requiredto understand customerand supplier cost savingsin an M&A environment
30 Broader Supplier Offerings and Strategic Supplier Relationships The more value added services provided by a supplier, the more strategic the relationshipTypical Offerings Broader OfferingsAs companies continue with the trend toward increased variable costs & outsourcing, strategic supplier relationships, along with broader offerings will become the normSupplier Managed InventoryProduct trainingWarranty utilizationKittingBusiness process outsourcingFull assembly or category vs. component sourcingCombination of products and installation
32 Why Should Strategic Relationships Be Important to You? Continuity of Supply - Especially During Tough or Volatile TimesA Single, Unbroken Supply Chain - From the Supplier Through to the CustomerContinual Dialogue - When Costs Go Up…and DownCost Performance Below Market Indices
33 Raw Material Prices Rising: What Does This Mean to Energy Consumers? Continuity of SupplyStrategic Supplier Relationships help to ensure continuity of supply for strategic material and service categories. This is especially important:During tough times (e.g. the California utility financial crisis)During periods of tight supply conditionsWhen markets are volatileTo ensure alignment with strategic prioritiesEdison Stays in Financial Limbo as Lawmakers Debate Rescue Plans; Energy: CFO of utility's parent worries that creditors may force bankruptcy if action is stalled in LegislatureRaw Material Prices Rising: What Does This Mean to Energy Consumers?
34 The Single, Unbroken Supply Chain The Single Customer/Supplier Supply ChainID NEED PROCUREMENT RECEIVING DISTRIBUTION MAINTENANCE DISPOSALSELL RECEIVE ORDER SCHEDULE/PLAN MANUFACTURE SHIP PAYMENTSupply Chain should be one single, unbroken chain from the supplier’s processes through the customer’sBuyers must have the same expectations from themselves and their companies as they have of their suppliersOne weak link can disrupt the entire supply chain
35 Examples of Strategic Relationships in Action $36M contract awarded based on Total Cost of Ownership in 1994, delivered originally 34% savings.Years , delivered an additional 12% TCO savings2006 awarded 5th 3 year extension with 3% annual TCO goals included in the contractWhile facing bankruptcy, only 1 of the 24 Strategic Suppliers to a $1.8B spend base changed terms or delivery optionsWhen one Strategic Supplier faced pending bankruptcy, their major customer pre-paid their orders to help them with cash flowWhen faced with escalating prices in raw materials, one Strategic Supplier worked with their major customers to secure 1 year of material on their behalf without confirmed orders
36 The Importance of Continual Dialogue Must have continual dialogue with suppliers - not just when prices go upContinuous improvement to reduce total supply chain costs is expectedMust be willing to look at costs and process for both the buying company as well as the supplierStrategic Relationships can’t be thought of as
37 The Expectation of “Better Than Market” Performance Strategic Supplier Relationships should deliver performance that is “better than market”Cost trends should be below market indicesPricing volatility should be passed onto those customers that buy marginal capacity, not those who have firm, long term commitmentsThis applies to quality, service and total cost performance
38 Why Strategic Supplier Relationships are Important A new supplier commences operations every minuteA supplier files bankruptcy every 8 minutesA supplier ceases operations every 3 minutesA judgment is filed against a supplier every 14 secondsA supplier name change happens every 2 minutesA supplier ownership change happens every 4 hoursA supplier’s risk profile changes every minute…world of constant change and challenges (opportunities)Source: Dun and Bradstreet
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