21st Century Purchasing In A Flat World

Dan Marino, CPIMSenior Partner

Marino Associates, LLC

21st Century Purchasing In A Flat World

• Purchasing organizations must become both Strategic and Tactical

• Purchasing organizations must understand the customer’s needs and wants

• Purchasing organizations must have drastically improved response times

• Purchasing organizations must be staffed with a highly educated and trained workforce

• Purchasing organizations must concentrate on continuous supply change improvements

• Purchasing organizations must forge the correct supplier alliances that meet the needs of the company

The Mission of 21st Century Purchasing In A Flat World

Develop best in class global suppliers for commodities that assist in managing cost and improving your competitive advantages

Develop Six Sigma Quality processes for all key commodities

Develop continuous improvement programs with your supply base with a goal of lead time reduction and a 100% on time delivery

Develop long term alliances with all key suppliers

Develop Processes that support operational goals

PURCHASING COMPLEXITIES

Logistics

Legal

IT

Finance

Engineering

Operations

Purchasing

21st Century Purchasing Changes

• Purchasing departments are going through many changes as the world goes flat. This is often reflected in departmental name changes:

• Sourcing• Strategic Purchasing• Tactical Purchasing • Commodity Specialist• Supply Chain Managers• Global Procurement • Materials Management• Buyer/Planners

21st Century Purchasing Change

• Along with the name changes has come the growing recognition of the importance of purchasing activities to the success of an organization

21st Century Purchasing Transformation

Stage 1- Classify all material in terms of profit impact and supply risk

Stage 2- Weigh the bargaining power of the suppliers against that of the purchasing company

Stage 3- Select strategic position; Exploit, Diversify, Balance

Stage 4- Develop action plans that coincide with these strategies

Stage 5- Educate and train key supply chain employees in 21st century concepts

Stage 6- Insure that internal systems and processes supports all your transformation goals

Purchasing Transition to LSCMToday TransitionPurchasing Silo’s Cross functional

Collaboration

Oppositional approachWith suppliers

Partnership/Alliances

Arms distance approach Shared goals and With internal customers rewards

Environment with waste Organization that embraces Lean

Reactionary response Strategic response

Purchasing Transformation Tools

• Process Mapping the Material and Information Flow

• Kaizen Blitz Events

• Optimizing ERP (ABC approach)

• Supply Chain Summit/Supply Chain Assessment

• Supplier Competency Model• Quality• Delivery • Financials• Operation Excellence • General Performance

• Lean Supply Chain Management

One of the most aggressive approaches in achieving

excellence in an organization is to develop and implement a superior Lean Supply Chain Management

process.

Best In Class Supply Chain Companies Are Realizing Financial

and Operating Advantages over

Their Competition

• More Responsive to Customer Needs

• More Responsive to Market Changes

• More Effective in Controlling Cost

MORE PROFITABLE

WHAT IS LEAN SUPPLY CHAIN MANAGEMENT?

Demand Management Sourcing and Procurement Order processing Production scheduling Inventory Management Transportation Warehousing Customer Service Information Systems Concurrent Engineering Quality Target costing

The process of managing the flow of material and information beginning at the lowest raw material level of the supply chain to the ultimate consumption of the finished product.

LEAN SUPPLY CHAIN MANAGEMENT BALANCE TO PROFIT

•Lack of Clarity•Variability•NPI•Information sharing•Decisions making ability•Organization issues•Inadequate systems

•Inventory Reduction•Lead time Reduction•Limit Liability•Rapid Ramp-up•On-time and complete•Cost reduction•Global Procurement

THE RESULTS OF AN UNBALANCED SUPPLY CHAIN

• Increased cost to expedite Material • Increased cost of premium freight • Increased cost of excessive inventory • Increased cost of excessive set-up charges • Increased customer dissatisfaction• Increased profitability decline

Supply Chain Balance Questions• Does your company understand the principles of Lean Supply

Chain Management?

• Do you understand your customers’ needs and requirements?

• Do you understand the roll of Logistics?

• Do you understand the operational and financial impact of Lean Supply Chain Management?

• Does your management team embrace Lean Supply Chain Management as both a strategy and a process?

• Do you have the systems, organization and expertise in place to maximize your Lean Supply Chain efforts?

21st Century Strategy

Best PriceEvaluation

Global Sourcing

Relationship Restructuring

Joint Process

Improvement

ProductSpec.

Improvement

Volume Concentration

Profit Improvement

Strategy

Cost Optimization Supplier andProduct Development

Consolidate SuppliersPool volume across unitsRedistribute volume among suppliersCombine commodity volume

Develop Total Cost of Procurement ModelRenegotiate pricesUnbundled pricing

Expand geographic supply baseDevelop new suppliersProfit from global supply/demand imbalances

Product and valueengineeringSubstitute materialsBuying alternativesOptimize life cyclecost

Value MappingShare informationIntegrate logisticsSupport supplier improvements

Establish/develop key suppliersEmploy strategic alliancesExamine make versus buyDevelop integrated supply chain

21st Century Required Business Improvements

Remove the Barriers with Aggressive Lean Supply Chain

Management

Inconsistencies in Business Practices Inconsistencies in the OperationInconsistencies in New Product IntroductionInconsistencies in Systems ApplicationsInconsistencies in the Organization

21st Century Tool Kit • Supply Chain analysis (value mapping)• Consignment• Vendor Managed Inventories• Inplants (JIT II)• Kanban• “Bread Man”• Relocating suppliers• Container control• Transportation control• Safety stock (or safety lead time)• Target costing• Buying capacity

SUPPLY CHAIN MANAGEMENT BUSINESS FORCES

• Cost Management and Reduction

• Demand Management:- Lead Time Reduction- Agility- Competitive Pricing - Global Sourcing- Outsourcing

• Software Sophistication

• Customer Satisfaction

• Risk Management

• Market Share and Margin Improvements

21st Century Flat World Procurement

• Review of all raw material suppliers. The focus should be on:

- Supplier Alliance- Supplier Quality- Supplier Flexibility - Transportation- Value Add

• Outsourcing should be reviewed - this is an excellent alternative for products that cannot be produced effectively internally.

• Global Procurement – this requires a complete set of specific Supply Chain Processes and Business Rules.

Questions For Manufacturing in a Flat World

• What and how many products will be produced?

• What will be produced internally and what will be outsourced?

• What are the customer satisfaction drivers?

- Price- Lead Time- Innovation

• Internal Controls- Inventory Goals- Capacity Requirements- Quality Requirements- Space Requirements- Transportation

MANUFACTURING – Cont'd.

• Selecting product to Global source

• Management of your Global partner

• Information exchange

• Logistics

21st Century Logistics • Determine inventory levels by product

based on an "A", "B", "C" Analysis of your inventory

• Limit the inventory liability in the entire Supply Chain

• Develop a process for pulling inventory through the suppliers to point of need

• Develop inventory management strategies:

- JIT II- Vendor Managed- Inventory- Consignment Inventory- KANBAN (Pull)

LOGISTICS – Cont'd.

• Make-to-Stock Strategy (MTS)

• Make-to-Order Strategy (MTO)

• Inventory Reduction Goals

• Inventory Processes to support Repair and Renovation

• Seasonal Demand Patterns

• Line Fill Rate Requirements

• Erratic Demand Requirements

• Many different SKU's

• Safety Stock Requirements

• Space Consideration

• Container Control

• Capacity Constraints

21st Century Technology

• Electronic Data Interchange (EDI)

• Internet

• Intranet

• Extranet

• Supplier Portals

• Bar Coding

• Computer ERP Systems with very sophisticated SCM Systems imbedded in the system

TECHNOLOGY QUESTIONS

• What is the sophistication level of the company and its suppliers?

• What am I trying to manage?- Standard parts procurement- Global sourcing and logistics- A combination of standard parts procurement and

major value add procurement- Supplier direct ship to your customers

• How far back in the supply chain do I want to manage?• What key measurements need improvement?

- Inventory Reduction- Quality Improvement- Lead-Time Reduction

- Cost Reduction

Knowledge Circle in a Flat World

CUSTOMER KNOWLEDGE

SCM

KNOWLEDGE

CIRCLESUPPLIER KNOWLEDGE

INFORMATION KNOWLEDGE

PROCESS KNOWLEDGE

PRODUCT KNOWLEDGE

CUSTOMER KNOWLEDGE

• Locations

• Demographics

• Purchasing Potential

• Demand Patterns

• Lead Time Requirements

PRODUCT KNOWLEDGE

• How many products?

• What percent of sales does each product represent?

• Where is each product in its product life cycle?

• What is the typical product mix?

• What are your margins per product?

• What are the true costs per product?

PROCESS KNOWLEDGE

• Understand the Production Process

• Process Flow

– Linear Flow

– Make-to-Order

– Demand Flow

» Push Process

» Pull Process

– Kanban

– Just In Time

• Delivery

– To Receiving

– To Point of Use

– To the Customer

INFORMATION KNOWLEDGE

• What information is required for effective decision-making at each stage in the Supply Chain?

• How will data flow between each part of the Supply Chain?

• Information on dynamics of the Supply Chain must be shared throughout the chain.

SUPPLIER KNOWLEDGE

• Supplier’s Processes and Constraints

• Supplier’s / Supplier Processes and Constraints

• Supplier’s Quality

• Supplier’s Lead Times

• Supplier’s Delivery Methods

SUPPLIER SUMMIT

– The Supplier Summit assists in defining mutual trust

between the Supplier and Customer.

– The Supplier Summit is a detailed study of all supplier systems and processes that deliver a product to a customer.

– The Supplier Summit provides positive feedback on processes under control and for processes needing work.

– The Supplier Summit establishes the customers’ requirements and assists in eliminating surprises.

SUPPLIER SUMMIT - CONT’D.

– Audit forms are given to the Supplier in advance.

– An Audit Team sends the Supplier a detailed agenda.

– Once the audit is complete, prompt audit feedback to

the Supplier is required.

– Audit Schedules a Credit Review at the Supplier’s

Facility.

– Regular Schedule Reviews Planned.

21st Century Trends

– Supplier Reduction

– Long-Term Relationships (Supplier Alliance)

– Suppliers located close to customers or VMI

– Integrated Information

– Suppliers considered to be essential part of the

business

– Suppliers involved with New Product Introduction

Managing your company's most expensive asset, material flow, utilizing a supply chain that can

rapidly flow information and material can be a significant competitive differentiator.

21st Century Key Performance Indicators

Customer Service•Line Fill•On-Time and Complete•Percent Time in Stock

Inventory•Days of Inventory•Inventory Turns

Speed•Cash to Cash (Inv+A/R-A/P) in days of supply

Days of working capital-DWC(Working Capital/Annual Revenue x 365)

Days Sales Outstanding-DSO(Accounts Receivable/Annual Revenue x 365)

Days of Inventory- DIO(Inventory Value/COGS x 365)

Days Payable Outstanding- DPO(Accounts Payable/Annual Revenue x 365)

Flat World Vision To Reality

'No company is safe… There is no such thing as a “solid,” or even substantial, lead over one’s competitors. Too much is changing for anyone to be complacent. Moreover, the “champ to chump” cycles are growing even shorter.’

Dan Marino, CPIMDanAM333@aol.com

21st Century Purchasing In A Flat World.

Please leave your business card and we will send a copy of this presentation and

Supply Chain Assessment