Procurement Strategy by Derek Hendrikz
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Transcript of Procurement Strategy by Derek Hendrikz
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Copyright © 2014
Derek Hendrikz Consulting
www.derekhendrikz.com
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The Interdependence of Delivery
Support
Delivery &
Production
Customer
Managem
entEffectiveness
Strategy
Efficiency
Policy
KnowledgeSkill
Attitude
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The Question!!! Do our cost calculations correctly
reflect reality?
Do our cost values effectively represent the effort which was spent to manufacture a product
or deliver a service?www.derekhendrikz.com
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Problems in cost measurement:
• There is no way to directly measure costs.
• Cost measurement is always an indirect process,
sometimes very indirect.
• Behind cost measurement are human beings who can
make mistakes and misinterpret the rules.
• In worst cases, there could be humans who have an
interest in distorting cost values.www.derekhendrikz.com
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Overall problems with measuring organizational performance:
• Activity-based costing struggle to locate activities to overall organisational functioning.
• Balanced scorecard methodology has generic perspectives that do not necessarily represent the essence of the organisation.
• Strategy cannot be linked to organisational action, resources and cost, because strategy represents +- 20 to 30% of what happens in the organisation.
• Current organisational structures are ‘one-parent’, two-dimensional structures.
• The organisation reports to people and not to outcomes.• Senior management do not understand the essence and nature
of mission and vision.
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You'll Find the Problem Here
•Structure;
•Systems; and
•Culture.
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Two-way classification of internal and external factors
Strategy
The Organization
• Goals & Values• Resources &
capabilities• Structure &
systems• Culture
The Industry Environment
• Competitors• Customers• Suppliers• Substitute
Producst• New Entrants• PEST
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Communicating & Linking• Communicating & Educating• Setting Goals• Linking rewards to performance
measures
Clarifying and Translating the Vision
and Strategy• Clarifying the Vision
• Gaining Consensus
Planning & Target Setting• Setting Targets
• Aligning Strategic Initiatives
• Allocating Resources
• Establishing milestones
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The Procurement Mission…
We acquire goods and/or services at
the best possible total cost, in the right
quantity and quality, at the right time, in
the right place and from the right source
for the direct benefit or use of our
organization, generally via a contract
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The Strategic Outcomes of Procurement:
1. Vendor Selection;
2. Vendor Compliance Management;
3. Acquisition; and
4. Contract Management (SLA & Works)
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The Structure of Procurement Strategy
Supply Chain StrategySupply Chain Strategy
Procurement Strategy
Procurement Strategy
Strategic SourcingStrategic Sourcing
Manufacturing StrategyManufacturing Strategy
Lean Manufacturing
Lean Manufacturing
Quality ManagementQuality Management
Organisational Strategy
Organisational Strategy
Inventory Management
Inventory Management
Transaction ManagementTransaction
Management
Supplier Relationship Management
Supplier Relationship Management
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Making the Procurement Decisionwww.derekhendrikz.com
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STRATEGIC LEVELS IN PROCUREMENT:
Integrative
Supportive
Independent
Passive
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Strategic Levels in Procurement Passive:
The procurement department does not have its own strategic direction and primarily reacts to requests from other functional areas.
Independent:
The procurement department has adopted strategic practices, but has not aligned these with the organisations corporate strategy.
Supportive:
The procurement department has adopted strategic practices and is supporting the organisations corporate strategy through their use.
Integrative:
The procurement department has become an integral part of the organisations corporate strategy and is actively working with other functional areas to implement that strategy.
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Make or Buy?
Vertical Integration:Vertical integration takes place where the organisation performs as many activities in the supply chain as possible, from the supply of primary materials to delivery to end customers.
Outsourcing:This is the practice where an organisation focuses on doing what it does best (its core competencies) and using outside suppliers to perform and supply all other ‘non-core’ activities.
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Advantages of Vertical Integration
• Provides management with maximum amount of control over performance and cost.
• Retaining in-house expertise.• Full utilisation of in-house assets.• Reduced risk in continuity of supply.• Reduced risk of commercial secrecy or
confidentiality.• Increased quality control.
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Advantages of Outsourcing
• Reduced Cost.• Access to suppliers expertise.• Increased capacity, leading to faster and more
flexible supply.• Reduced capital employment.• Reduced headcount.• More accurate operating cost.• Concentrate on core business activities.• Reduced inventory.
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Project-based Work Process-based WorkOutsour
cing
Insource
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OverheadCost
VariableCostVS
Enhanced through in-sourcing
Enhanced through out-sourcing
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Supplier rationalization or Expansion
Pro’s & Con’s
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Advantages of Supplier Rationalization:
• Supplier much more responsive to customer needs.
• Reduces the amount of inventory held by the customer.
• Stronger relationship with suppliers.
• Increased supplier involvement & commitment.
• Strong customer / supplier relationship.
• Suppliers involved in planning activities of the customer.
• Push for supplier to build their capabilities for future customer requirements.
• Suppliers involved in drawing up specifications.
• Suppliers involved in product design & development.
• Customers can use suppliers in-house technologies & expertise.
• Customer to receive more cost-effective and higher quality designs.
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Advantages of Wider Supplier Choice:
• Fosters competition amongst suppliers.• Enables customer to play suppliers of against each
other in order to achieve lowest possible price.• Lowers risk when there is a problem with existing
suppliers.• Lowers risk of supplier holding the customer
ransom.• Lowers risk of inability to supply by one supplier.
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HIGH
Risk
LOW
Critical Items/Potential Bottlenecks
Example: scientific equipment
Goal: quick turnaround, minimal disruption of day-to-day operations
Natural owner: user’s department
Role of Procurement Office: support for user’s department
Strategic Items
Example: capital improvement
Goal: maximum value for money
Natural owner: user department with advice from Procurement Officer
Role of Procurement Office: part of cross-functional team
Routine Items
Example: catering supplies
Goal: efficiency of process, cost reduction
Natural owner: user department with advice from Procurement Office
Role of Procurement Office: leads sourcing (user’s department leads execution
Leverage Items
Example: office supplies
Goal: lowest price
Natural owner: Procurement Office
Role of Procurement Office: centralised procurement, with no exceptions
LOW Savings Potential HIGH
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Strategic Procurement Matrix
Bottleneck items:Here it is important to ensure that supplies are not interrupted.
Strategic items:Here the emphasis is on co-operation of suppliers.
Routine items:Here the emphasis should be on the most efficient way to procure the product.
Leverage items:Here it is important to find the best deal.
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Examples of factory scenario…
Bottleneck items:Specialist manufacturing equipment.
Strategic items:Expansion of factory space.
Routine items:Safety gear.
Leverage items:Stationary.
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• High Risk• High Savings
Potential
• High Risk• High Cost
• Low Risk• High Cost
• Low Risk• Low Cost
Strategic Items Bottle Necks
Routine Items
Leverage Items
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STRATEGIC PROCUREMENT MATRIX:
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