Trade Management Sourcing & Optimising Strategies Module 8

Trade Management Highlights Buyer / Chief Purchasing Officer – Challenge Supplier Base Optimization Strategic Sourcing Process Supplier – Financial Analysis Risk Management Supplier Evaluation (Performance Audits)

Trade Management Purchasing Issues: Re-focus on process capabilities Organisations are / need changing Supply Market and Sourcing Strategies are changing Warehousing & Transportation are getting sophisticated Increased use of technology and suppliers’ capabilities - to obtain visibility of the supply chain

Trade Management Purchase Manager’s Issues Who are your key suppliers? What is your organisation total spend each year? What is the spend by category / supplier? (Eg. raw materials, IT) What is the total acquisition cost (TAC) & the life cycle cost of capital purchases? What is the value your suppliers provide towards your organisation’s success and reputation? How to manage vendor performance? What are the purchasing risks and how to manage it? What are you Out / In-sourcing? Whether your purchasing strategies are aligned with business strategies? What percentage of your external spend is managed by purchasing? Do you assess the outcome of your negotiations? How do you develop your key suppliers? What financial metrics to focus on?

Trade Management Purchasing Optimisation: 80/20 Rule Analysis to identify, 20% of suppliers receiving the majority of purchase dollars Identify the minority of suppliers causing the majority of problems 80/20 rule assumes the best suppliers receive the majority of purchase dollars

Trade Management Purchasing Optimisation (cont) With too large a supply base, the challenges Supplier integration Collaborative agreements Supplier development Joint total quality/cost reduction efforts To determine the right mix of capable suppliers Optimisation does not only mean adding or reducing suppliers. It can mean switching suppliers, also !! Optimisation does not mean supply base reduction As companies continue to rely on fewer total suppliers, the selection process takes on even greater importance

Trade Management Purchasing Optimisation Benefits: Reduced supply base risk Lower transactions costs Leverage leading to lower purchase costs Ability to pursue value-added activities Opportunity to work with world-class suppliers, which leads to improved value chain performance

Trade Management Purchasing Optimisation Critical Success Factors: Time Cross-functional teams Supplier measurement system Strategy development process that considers optimisation goals Overall supply base vision with Senior Management support

Evolution of Sourcing Strategic Sourcing Traditional Purchasing Global Supply Management Paradigm Transaction Project Enablement Focus Price, Transaction management, Compliance Supplier rationalisation, Spend consolidation, Cycle-time reduction, Standardisation Balancing Total System Cost; Maximising shareholder value; Enabling product innovation Reach Local; Many suppliers Multi-regional, Some collaboration with related functions Global; Highly collaborative across the enterprise and visible at executive levels Technology Spreadsheets Auctions, eSourcing, Basic optimisation Technology enablement across all strategic sourcing processes People Decentralised Buyers Commodity Teams, Center-led or centralised Cross-functional teams Global

Strategic Sourcing Process Analyse Spend Identify Requirements Market Implement Strategy Manage Negotiations Award & Contract Develop Traditional Procurement Strategic Sourcing Supplier Evaluation and Selection Management Development

Analyse Spend Buyer Buying analysis across all divisions Total number of suppliers used Compare pricing across divisions Consolidate spend, reduce suppliers and obtain better pricing Tools Spend Analysis

Identify Requirements Buyer Users - product and service requirements Quality requirements Product specifications Service performance expectations Identify different requirements across divisions Consolidate opportunities Tools Specifications Surveys Interviews

Analyse Market Buyer Tools Specific market conditions Rising input costs, capacity constraints, barriers to entry Supply base constituents Many players, dominant players Analyse new products, services or diverse suppliers Tools Internet research Benchmarking

Develop Strategy Buyer Based on the internal requirements, industry dynamics Negotiate with current supplier(s) Bring in new suppliers Bid Reverse Auction Traditional RFI, RFP, RFQ Tools eSourcing tools Cross functional teams Project Management

Manage Negotiation Buyer Develop criteria for evaluating proposals based on internal requirements Initiate negotiations under chosen strategy Compare and rank results based on key criteria Tools Online RFX Weights / Scoring Models Standard templates Reverse Auction

Award Contract Buyer Based on results, determine best overall supplier(s) Cross-functional team decision Finalise contract terms and conditions with suppliers Involve finance and legal Tools Automated weights / scoring Online contract management Cross functional teams

Implementation Strategy Buyer Determine how contract will be rolled out Change management strategy Identify and track performance metrics Communicate value to stakeholders Tools Supplier Performance Supplier Portals Spend / Diversity Reporting

Financial Analysis - When & Why.. When do it? For critical items For new suppliers When pursuing longer-term agreements For purchase requirements involving significant dollars Why do it? To manage business risk To eliminate marginal suppliers early in the evaluation process

Ratio Analysis Profitability Liquidity How profitable is the supplier? What rate of return is the supplier earning? Gross and net profit margin Return on equity Return on investment Liquidity How capable is the supplier of meeting short-term cash needs? Current ratio Quick ratio

Ratio Analysis (Contd.) Leverage Is the supplier over-leveraged and capable of paying long-term obligations? Debt to assets Time interest earned Fixed charge coverage Activity How effectively is the supplier managing assets? Inventory turnover Average collection period Return on net assets

Contract Management Termination (Escape) clauses Service Level Agreement (SLA’s) Clear communicated specifications Key Performance Indicators (KPI’s) Feedback and review on a regular basis Liquidated damages for poor performance

Risk Minimisation

Supplier Performance

Improvement Action Plan

Supplier Audit Check Sheet