April 21, 2010

Strategic BCC Sourcing – setting the stage

2

OBJECTIVES

• History of Global Sourcing

• Strategic Drivers – External and Internal• External Drivers in Today’s world

• Internal drivers - VOC

• Supply Chain Framework and Strategic BCC Sourcing Process• Supply Chain Objectives

• Supply Chain Framework

• Evolving Strategic Sourcing

• BCC Sourcing Process – DMAIC Strategy

• BCC Sourcing Tools and Trackers• BCC Sourcing Tactical tools

• BCC Supplier Selection Matrix

• Performance and Score carding

• BCC Tracking mechanisms

• Total Landed Cost• BCC Landed Cost

• BCC Logistical Support

• Risks vs Benefits• Managing Benefits vs Risks

• Risk management Tools

• Country specific core competencies and sensitivity

• Today’s BCC Sourcing People Profile

3

History of Global

Sourcing

4

A LOOK BACK IN HISTORY

5

Strategy Drivers –

External and Internal

6

TECHNOLOGY AND

INFORMATION SYSTEMS

EMPOWERED CONSUMER

SUPPLY CHAIN

INTEGRATION AND

POWER SHIFTS

GLOBALIZATION

• LONGER AND MORE COMPLEX SUPPLY CHAIN

• SHORTER PRODUCT LIFE CYCLES

• BLURRING OF TRADITIONAL ORGANIZATIONAL BOUNDARIES

• “BRIC” FACTOR –NEW MARKETS AND SOURCES OF SUPPLY

• CONNECTION IN A FLAT WORLD

• WAL-MART EFFECT

• CUSTOMIZATION, VALUE ADDED SERVICES AND COLLABORATION IN SUPPLY

CHAIN

• COMPETITIVE ADVANTAGE BASED ON SUPPLY CHAIN EFFICIENCY

• ECONOMIC DEREGULATION OR REREGULATION

• ENVIRONMENT AND SAFETY

• SECURITY

• TRADE POLICY, TAX POLICIES AND USER CHARGES

EXTERNAL STRATEGY DRIVERS IN TODAY‟S WORLD

• REQUIREMENT FOR BEST PRICE, BEST QUALITY AND BEST SERVICE

GOVERNMENT POLICY

AND REGULATIONS

7

Actual comments from internal customers–

• Quicker lead time on requests

• Why won’t they ditch us when times are good or if they get a higher margin business

• Would they charge higher prices for lower volume or would they have a minimum volume threshold

• We would love to get finished assemblies as opposed to component material only

• With them being a world away and with the time difference and language issues, how would they ensure customer service coverage

• China is known to have quality issues – would our quality deteriorate

• Can they help us manage our inventory better

Voice of the Customer Metric

31%

25%

11%

20%

10%

3%

0%

5%

10%

15%

20%

25%

30%

35%

Price Quality Delivery Capacity Customer

Service

Other

INTERNAL STRATEGY DRIVERS - VOICE OF THE CUSTOMER

Areas of focus:

Price

Quality

Capacity

Delivery / Customer Service

8

Supply Chain

Framework and

Strategic BCC

Sourcing Process

9

• Focus Areas

• Providing Business Value (Cost, Quality, Delivery, Inventory)

• BCC Sourcing optimization

• NPD integration and support

• Rationalizing the supply base

• Organizational development

• Key Metrics

• Deflation savings (PPV/PPI)

• x% of spend from Best Cost Countries

• Reduce supply base by x%

• Inventory reduction by $xxm

• Launch supplier performance program

KEY SUPPLY CHAIN MANAGEMENT OBJECTIVES

Business

Strategy

Operations / Supply

Commodity

Supplier Scorecard

Supply Base

NPD / Innovatio

nCost

Delivery

Quality

Inven

tory

Business

Strategy

Operations / Supply

Commodity

Supplier Scorecard

Supply Base

NPD / Innovatio

nCost

Delivery

Quality

Inven

tory

Improving the linkage: Strategy - KPI’s - Performance

10

ANALYSIS OF STRATEGIC BCC SOURCING PROCESS

Analyze

Spend

Identify

requirements

Analyze

market

Manage

Negotiations

Develop

StrategyIMPLEMENT

Award and

contract

ANALYZE SPEND:

What are we buying

How many suppliers do we use

Can we harmonize and consolidate

IDENTIFY REQUIREMENTS:

Quality requirements

Product Specs

Performance expectations

ANALYZE MARKET:

Porter’s 5-forces analysis

Conditions of specific market

DEVELOP

STRATEGY/NEGOTIATE:

Direct Negotiations

Rebates

VA-VE

Reverse auction

Traditional RFQ

AWARD / IMPLEMENT:

Establish key performance criteria

Create comparison master

Establish specific LTA / terms

Establish roll-out plan

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DETAILED BCC BUSINESS PROCESS

Disciplined Approach, Operational Excellence, Business Results

12

BCC Sourcing Tools

and Trackers

13

GETTING DOWN TO THE TACTICAL

Date:

Part Number:

Description:

Drawing & Rev.

ITEM

CO

MPL

ETE

RES

PON

SIB

LE

INIT

IALS

1 SC/Engg

2 SC/Engg

3 SC/Engg

4 SC/Engg

5 SC/Engg/QA

6 SC/Engg

7 SC/Engg

8 Engg, Q/A

9 Engg, Q/A

9 SC/Engg

10 Engg, Q/A

11 SC

12 SC, Q/A

13 SC

14 SC, Q/A, Engg

15 SC

16 SC

17 SC,Q/A, Engg

18

Reports/documentation required for submission: SC,Q/A, Engg

19 Other: ALL

Parker US Cylinder Division Quality _____________________Supplier Quality

Parker US Cylinder Division Supply Chain _________________Supplier Purchasing

Parker US Cylinder Division Engineering _________________Supplier Engineering

Supply marked-up part that is permanently identified: "Not for Dimensional Reference".

Special machining knowledge issues identified.

All applicable manufacturing methods included.

Other visual or not specified information attached (implied knowledge).

Sign Off:

Past quality issues/lessons learned.

Ramp up schedule.

List of all tooling/gauging provided.

Manufacturing change request.

Sample approval: part, fixture, cavity or tool.

Document control.

Confirm gauge calibration.

Special testing required:

Clearly identified expectations.

Samples required for our testing: _________ (qty).

CHECK SHEET FOR OUTSOURCING PRODUCTS

Current Drawing Provided.

All applicable deviations, DRR's and modified manufacturing instructions included.

Validation Matrix

DESCRIPTION

Identify any special characteristics or gauging.

14

THE MORE INFO – THE BETTER

Vendor / Purchase Order Information

Vendor Details Ship To Details

Company Name

Contact Name

IQS Supplier #

Address

Zip code

Phone

Fax

Email

People -Copy on PO

Part Number Unit Price Order Qty. EAU Dwg. Number MS- Spec Alt. MS Spec Sup Matl

Shipping Information

Expeditors International is shipper required by Parker Hannifin, Contact Lisa Trevino with purchase order information

Special Notes

Special Processes Needed

Coatings Required

Standards Outside Parker to Meet

Packaging Requirements

Warehousing Requirements

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SUPPLIER COMPARISON MATRIX

Incumbent Dom 1 BCC 1 BCC 2

PIECE PART

PRICING7 -1 7 9 7

Over 20%

reduction

10-20%

reduction

5-10%

reduction

Little or no

reduction

PAYMENT TERMS 3 7 3 1 7Net 45 with pre-

payment

discount

Net 30 with pre-

payment

discount

Net 45 Net 30

CUSTOMER

SERVICE5 1 7 3 9

Excellent

proactive

support -

provides PCI

Active support

available

Basic

support

available.

Not

consistent

Limited

support

OTHER COST

SAVINGS7 3 7 3 9

Committed YoY

in addition to

piece price

Committed for

finite period

only

Potential

discussedNone

ENGINEERING /

STANDARDIZATION

SUPPORT

5 1 7 3 9

Complete Web

tool for part

selection and

standardization

Some

standardization

support

Limited

supportNone

DELIVERY 9 7 3 7 9 < 90 days 90 - 119 days120 - 134

days

> 135

Days

INVENTORY

REDUCTION7 1 7 3 9

> 25 Inventory

turns20 - 25 turns

11 - 19

turns

10 or less

turns

IMPLEMENTATION

TIME3 9 3 7 3 0 days 60-90 days

90-120

days

> 120

days

142 262 222 376

DATE REVIEWED

SCORE >>>

BCC Supplier Assessment

Scoring rulesSUPPLIER

SCORING (1,3,7,9) 9 7 3 1IMPORTANCE

31-Mar-10

16

S.C.O.P.E. - SUPPLIER PERFORMANCE MEASUREMENT AND SCORECARDING

Process/ResponsivenessInvent ory

Tot al Cost Delivery

Overall Responsiveness

Paym ent

PPV

Invent ory Mgm t Type

Quant it y

Days of Supply

Lead Tim e

On Tim e

Overall sco re t o b e

d et erm ined b y

w eigh t ed average o f

. all t hese cr it er ia

Qualit y

SCAR

Percent

YoY Cost

Supplier Scorecard

100%

75%

25%

80%

60%

15%

25%

10%

10%40%

60%

100%

25%25% 25%

20% 5%

• Driving supply base accountability

• Robust mechanism to measure

Supply base performance

• Integration into supplier NPD

decisions

• Increased supply leverage

• Supply base rationalization

• Linking performance to “reward

opportunity” or “development

/corrective action”

• GREEN – Preferred Suppliers

- Leverage

- Provide opportunity

• YELLOW – Good Suppliers

- Move to green

• RED – Needs Improvement

- Move to yellow or exit

17

Excellence in Total Supply Chain Management through

Spend Profile

Supplier Spend Database

Cost Reduction project Tracker

SPEND PROFILE

ROBUST TRACKING MECHANISMS

18

SUPPLIER SPEND DATABASE

OBJECTIVE:

Formalized supplier positioning and risk ratings can be

used in Growth/Exit strategies

Facilitates accurate supplier strategy deployment

Buyers can reference this for all sourcing/selection

decisions

Can be utilized by quote cells for accurate estimating

decisions

Driving Supply Base Accountability/Development, Correct Sourcing Decisions & Your Leverage

19

STRATEGY

PROJECTS

RESULTS

ASSESS

REPEAT

COST REDUCTION PROJECT TRACKER

•Drives overall material cost reduction strategy

•Ensures proactive instead of reactive focus on

unfavorable PPV / PPI

•Ensures a formalized project based process to

drive cost savings target

•Drives behavior and accountability to execute

targets - Accurate measure of PPP

•Provides quantitative and qualitative view into

YTD deflation performance

•Identifies root causes for missed cut-in dates

•Can be utilized for annual/STRAP planning

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PLANNING

•Identify spend profile

•Pareto 80-20 supplier spend segmentation

•Develop spend strategy by country

•Identify current suppliers to re-source/exit

•Establish qualified supply base by categories in BCC

PROCESS FLOW FOR STRATEGIC BCC SPEND MANAGEMENT

Strong project

management

focus to

drive

effective

execution

EXECUTION

•Execute a disciplined robust BCC business process

•Establish and implement measurable tracking mechanism

•Establish a defect containment process

•Establish an objective supplier evaluation process

•Stratify the BCC supply base based on key criteria:

-Relationship/risk type

-Strategy/Performance ranking

•Formalize supplier rating

•Establish a quantitative growth/exit process

21

Total Landed Cost

22

Costs of assists

Cost of special export packaging

Transportation / Port handling (inland/wharfage/loading/freight-fwd)

Export processing fee

Warehousing charges

Ocean / air shipment

Marine insurance premiums

Customs house broker fees

Customs duties

Finance charges

Foreign exchange and/or material hedging costs

Additional inventory carrying cost

:

:

KEY COMPONENTS OF LANDED COST

1

3

4

2

5

6

7

8

9

10

11

12

If applicable,

consider product

postponement

and/or FTZ

23

COMPLEXITY OF TARIFF SCHEDULES

Chapter: Chapter 18: Cocoa and Cocoa Preparations Heading: 1806: Chocolate and other food preparations containing cocoa Sub-Headings: 1806.20: Bulk chocolate preparations more than 2 kg 1806.31: Filled chocolate in blocks, slabs or bars 1806.32: Unfilled chocolate in blocks, slabs or bars 1806.90: Other chocolate Country Classifications:

Australia China EU Chocolate Crumb 1806.20.0019 1806.20.00 1806.20.7000

Snickers 1806.31.0011 1806.31.00 1806.31.0090

Dove Bar 1806.32.0013 1806.32.00 1806.32.9099

Dove Miniatures 1806.90.0017 1806.90.00 1806.90.3900

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Risks vs Benefits

25

• Costs and Efficiencies

• Lower labor cost

• Lower land and facility cost

• Lower taxes

• Government subsidies

• Strategic

• Bringing value-add to the product line

• Reducing risk in the supply base by cutting out the middleman

• Penetration of growth market

• Promotes healthy competition between suppliers

• Conforming to industry standards and providing options to customers

• Value

• Improved quality

• Improved delivery and reliability

• Improved new product introduction

• Creates part-family realignment (supply base rationalization)

BENEFITS OF GLOBAL SOURCING

26

• Costs and Efficiencies

• Transport, travel, corruption, processing and legal fees

• Bureaucracy

• Customs requirement

• Strategic

• Piracy / Abuse of IPR

• Language, cultural and time issues

• Security issues

• Value

• Quality issues

• Lower responsiveness

• Long lead time – higher inventory implications

HIDDEN COSTS OF GLOBAL SOURCING

Cost of running out

far exceeds

the cost of

carrying

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Supply Chain disruptions

Currency fluctuations

Availability of raw material

Environmental concerns

Social responsibility concerns

Domestic job loss - EFCA

Regulatory and legislative changes

Exposure to local economic, social and political conditions

Cultural variations – communication issues

Natural disasters / Terrorism / Global pandemic

Strikes and demonstrations

Date format

:

:

KEY RISKS

1

3

4

2

5

6

7

8

9

10

Always have a

contingency plan

11

12

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• Nokia and Eriksson used the same chip supplier. After a fire shutdown the supplier‟s manufacturing

units, Nokia bought all capacity at an alternate source and prevented Eriksson from selling that

particular phone for 1 year

• Nike‟s reputation was severely affected due to alleged practices at their supplier

• Approximately 10000 containers a year are lost overboard

• Heavy seas can damage containers and contents

• The 2004 South East Asia tsunamis resulted in several shutdowns due to lost containers and / or ships

• Motorola closed a plant in Singapore due to 1 worker being infected with SARS

RISK EXAMPLES

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• A golf ball manufacturing company packaged golf balls in packs of four for convenient purchase in Japan

• Unfortunately, the number 4 is inauspicious (it sounds like the word "death“) in Japanese

• The company had to repackage the product

• Pepsodent tried to sell its toothpaste in South East Asia by emphasizing that it "whitens your teeth“

• They found out that the local natives chew betel nuts to blacken their teeth which they find attractive

• Staff at an African port saw the „internationally recognized‟ symbol for “fragile” and presumed it was a box of broken glass Rather than waste space they threw the boxes in the sea

• One company printed the "OK" sign on each page of its catalogue. In parts of Latin America that is considered an obscene gesture. Six months of work were lost because all catalogues had to be reprinted

• Coors had its slogan, “Turn it loose," translated into Spanish, where it became "Suffer from diarrhea”

• IKEA once tried to sell a workbench called FARTFULL - not a hugely popular product for obvious reasons

CULTURAL RISK

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RISK MANAGEMENT TOOLS

• Relationship Rating:

• 1=Extremely good

• 16=Extremely strained

Attractiveness

of Account

% of Sales

NUISANCE

DEVELOPMENT

EXPLOITABLE

CORE

Lo Hi

Lo

Hi

Attractiveness

of Account

% of Sales

NUISANCE

DEVELOPMENT

EXPLOITABLE

CORE

Lo Hi

Lo

Hi

Supplier

Positioning * Customer

Preferencing =Relationship

Rating xRisk

Severity

Ratingx

Risk

Occurrence

Rating=

Risk

Management

Score

Customer

Preferencing

• Risk Severity Rating:

• 1 = Very little impact if this supplier couldn't supply. Easily replaceable by

other suppliers

• 5 = Some impact if this supplier couldn't supply. Temporary line shutdowns

imminent. Will take some time to get a replacement solution with medium

level of engineering/testing support. Other suppliers are available with some

technical modification.

• 9 = Substantial impact if this supplier couldn't supply. Extremely long lead

times. Highly specific component. Long validation time due to

safety/technical requirement. Could shut down line for a few weeks or longer.

• Risk Occurrence Rating:

• Based on financial position of the

supplier, labor situation at the

supplier and economic factors at

supplier's country of production

• 1 = Very little risk of supply

disruption (<20%)

• 5 = Medium risk of supply disruption

(20%-70%)

• 9 = Great risk of disruption (>70%)

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COUNTRY SPECIFIC CORE COMPETENCIES

32

• Great emphasis on relationships

• Guanxi = relationship (critical to success)

• Many hours spent in socializing

• Want to understand their business partners 1st

• Want to please their customers

• Very polite

• Meiwanti - no problem - Hesitant to say “no”

• Ask & ask again

• Great “can-do” attitude

• Greater familiarity with American customer base

• Never “lose face”

• Major blow to embarrass China host

• Find diplomatic ways to work around issues

• Direct attacks generally don’t end well

NUANCES OF RELATIONSHIP WITH CHINESE SUPPLIERS

33

• Great emphasis on relationships• Initial socialization to understand customer

• Interaction is more on equal footing

• Polite and low key wins respect

• More emphasis on position/title than China

• Communications• Much more direct in communications/opinions

• “Let us see where we can be”

• English used widely in business

• Do not break chain in communications

• Generally “top down” management style

• Time could be a fluid concept – IST!

• Greater familiarity with European customer base

NUANCES OF INDIANUANCES OF RELATIONSHIP WITH INDIAN SUPPLIERS

34

BEWARE………

• Mispronunciation of names / companies

• If you don’t know – ask

• Asian companies consider slips disrespectful

• Do not automatically use first names

• Being impatient not well tolerated

• Projecting the feeling of superiority not well tolerated

• Make communications as clear as possible

• Don’t expect automatic understanding

• Don’t be abrupt/short

35

Today‟s BCC Sourcing

People Profile

36

TODAY‟S GLOBAL SUPPLY CHAIN PROFESSIONAL

Boundary less Thinker Network Builder

InterpreterDiplomat

• Finding and linking with complementary partners

• Relationship mindset

• Knowledge of own value and core competency

• Ability to recognize others‟ value and core competencies

• Search for synergy

• Thinking beyond the status quo

• Big picture perspective

• Openness to ideas

• Willingness to look beyond oneself for capabilities and

resources

• Developing the skills to manage networks

• Ability to relate

• Ability to communicate

• Ability to negotiate

• Helping partners see the benefits of working together

• Ability to influence others

• Solid knowledge of business

• Broad knowledge of marketplace

37

DIBYAVA GHOSH

dibyava.ghosh@parker.com

847 331 2986

CONTACTING THE SPEAKER

38

Thank you