Strategic Supplier Relationships New Strategies for Changing Times ISM Chemical Group Las Vegas,...
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Strategic Supplier Relationships
New Strategies for Changing Times Strategic Supplier Relationships
New Strategies for Changing Times
ISM Chemical GroupISM Chemical GroupLas Vegas, NevadaLas Vegas, Nevada
20062006
2
Agenda
Background– Trends in Strategic Supplier Relationships
– Characteristics of Strategic Supplier Relationships
– Selection Criteria
New Approaches for Strategic Supplier Relationships
Real-Life Management of Strategic Relationships– How This is Different From Other Approaches
– Challenges
Q&A
3
Introduction
4
About Denali Consulting and SupplyStaff
Management consultancy, formed in 1996 Focus is exclusively in Supply Chain
Management consulting Primary industries include service based
and capital-intensive clients Electric & Gas Utilities Financial Institutions Oil & Gas Mining
Services include Strategic Sourcing & Procurement Improvement Logistics Optimization Supply Chain Strategy & Assessment Organizational Development & Design
Supply Chain Staff Augmentation and Search / Recruiting
Typical positions include: Sourcing & Logistics Analysts Sourcing & Logistics Managers Supply Chain Directors & V.P.’s
Offer temp-to-perm conversions at no extra cost after 6 months
Since Supply Chain Management is our only focus, we are experts at finding the best talent for today’s Supply Chain organizations
Provide payroll, benefits, HR services for all resources
Denali Consulting and Supply Staff are certified as woman-owned businesses by WBENC
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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
• Transformers• Build-Up Trucks• Wire & Cable• Chemicals• Gases• Facility Design & Construction• Vegetation Management/Line Clearing• Meters• Janitorial Services• Turbines & Generators• Automated Metering• MRO• Plant and Facility Maintenance• Travel Related Services• Computers & Desktop Services• Benefits Management• Pipeline Maintenance• Injection Molded Parts• Pole Replacement
• Castings• Drug & Alcohol Testing• Fuel & Lubricants• Drilling Equipment• Rotors• Motors & Generators• Supplemental Personnel• Boilers• Switchgear• Line Hardware• Application Development Services• Engineering Services• Office Products & Furniture• Printing & Reproduction Services• Freight & Logistics• Underground Construction• Packaging• Circuit Breakers• Construction Services
Partial Listing of Commodities & Services Sourced by Denali
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Background
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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.
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Once Again a Procurement “Best Practice”
Introduction of Strategic Sourcing & Strategic Alliances
Emergence of eSourcing tools & eMarketplaces
Beginning of Volatile Commodities Markets
1990 1995 2000 2005
Per
ceiv
ed I
mp
ort
ance
of
S
trat
egic
Su
pp
lier
Rel
atio
nsh
ips
Low
High
Industry Consolidation Waves
10
Why are Strategic Supplier Relationships More Important Now Than Ever?
Volatile Markets
– Price-focused sourcing strategies don’t work in periods of increasing commodity prices
– More sophisticated relationship-based approaches are required to meet utility cost reduction targets
– Based 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 materials
Merger & Acquisition Trends
– Larger, national/global presences of utilities require more strategic supplier relationships to support growth and cost synergy targets
Expansion of Supplier Value-Added Services
– Suppliers continue to expand their value-added services offerings, increasing the value of strategic supplier relationships
– Outsourcing
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Strategic Relationship Characteristics
Types of Goods & Services High $ Spend Critical business implications Custom engineered Limited availability or alternatives
e.g. Line Construction Services, Transformers
Buying Considerations Trust is a major issue Cross-functional involvement Highly resource intensive Long range planning required
Competitive Advantage Driven
Supplier Relations Longer Term Agreements Total interaction Close working relationship Aligned objectives and philosophy
Teamwork
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Strategic Relationship Criteria
MANAGEDBUSINESS
RELATIONSHIPS
STRATEGICRELATIONSHIPS
GENERALPROCUREMENT
BULKPRODUCTSOURCING
Potential for impact
Common values
Aligned goals
Proper environment
VALUE / COST
CO
MP
LEX
ITY
/IM
PA
CT
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 activities
Trust Open communication and disclosure of business drivers
Performance Continuous improvement towards agreed targets andKPIs
People Clearly defined roles and responsibilities
Proactive Anticipating business needs and providing creative solutions
Profit at Risk Establishing real metrics to drive behaviour for both parties
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Focus
A Team of representatives from the Buying Company and the Supplier jointlydevelop a Business Plan for the Relationship, addressing:
•Vision and Mission•Drivers and Values•Breakthrough Strategies •Continuous Improvement Strategies•Key Activities for the Period of the Plan•Key Measures of Success
A common vision for the relationship, with agreed strategies and activities
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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 margins
•More use of incentives to create business drivers for suppliers to provide R&D support…for cost savings or driving new revenue avenues
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Performance
Continuous improvement towards agreed goals
Establish Continuous Improvement Program to Generate and document opportunities for value adding and process improvement Implement ideas Document benefits achieved
Develop KPIs to quantify progress against Key Measure of Success identified in the Business Plan Customer specific measures
Jointly review progress on a regular basis
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Sample KPI ScorecardKP1 DESCRIPTION a
WEIGHTb
TARGETc
ACTUAL(eg)
dFACTOR
c/b
eSCORE
a*d
Cost Savings Must be recorded on IdeaEvaluation Forms and Signed Offby User, Supplier & Supply Dept.Refer section on valuationmethods.
30 10% pacumulative
(ceiling at 10%)
6% 0.6 18.0
DeliveryPerformance
Contract - within 24 hoursNon Contract - as agreed atorder
20 96 98 1.02 20.4
BreakdownResponse
Contract - within 2 hoursNon Contract - as agreed atorder
15 95 100 1.05 15.8
Quality NCR’s receivedNCR’s actioned
55
1/mth100%
1.5/mth80%
0.50.8
2.54.0
TechnicalSupport andService
Refer to the section on TechnicalSupport and Service
15 65% 70% 1.1 16.5
BusinessPlanObjectives
Meeting the objectives agreed toin the annual business plan
10 90% 100 1.1 11.0
Total Score 100 90= ranking to
extend contract
93.2= extension of
contract
ExampleExample
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People
Customer
Category Manager/Lead BuyerManages the performance of the contract and supplier across the organization
Customer RepresentativeResponsible for the applicationof contract to a specific customer group
Supplier Development TeamRepresentatives of major customer groups who the determine strategy for the category and monitor supplier performance against KPIs
Supplier
Account 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
Clearly defined roles and responsibilities
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Proactive
Customer & Supplier
Quick responsiveness in sharing ideas
Risk taking behaviour rewarded and encouraged
New ideas move through system of approval on fast track
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Profit at Risk
Bottom-Line Impact
Performance to agreed upon targets is expected-not rewarded
Insist 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-upContractStart-up
Planning andImplementationPlanning andImplementation
SupplierRelationshipManagement
SupplierRelationshipManagement
Contract andPerformanceManagement
Contract andPerformanceManagement
ValueDiscoveryValueDiscovery
Develop DetailedTransition Plan
Develop DetailedTransition Plan
ConductImplementation
ConductImplementation
Plan CompetitivenessAssessment
Plan CompetitivenessAssessment
Review and DefineCategory Strategy
Review and DefineCategory Strategy
Develop SupplierRelationships
Develop SupplierRelationships
Manage StakeholderCommunications
Manage StakeholderCommunications
Develop CommunicationApproach
Develop CommunicationApproach
Perform RelationshipCheck-Ups
Perform RelationshipCheck-Ups
Manage ContractVariations
Manage ContractVariations
Review CategoryPerformance
Review CategoryPerformance
Conduct Internal andExternal AssessmentConduct Internal andExternal Assessment
Develop Options andRecommendations
Develop Options andRecommendations
Obtain StakeholderApproval
Obtain StakeholderApproval
Manage Contract andSupplier PerformanceManage Contract andSupplier Performance
ManageContract End
ManageContract End
Create Total Cost Model (if not already
in place)
Create Total Cost Model (if not already
in place)
Conduct Value Analysis Workshop (s)
Conduct Value Analysis Workshop (s)
23
What’s New With Strategic Supplier Relationships
New approaches are being required to deal with new environmental factors in the supply chain
Volatile MarketsVolatile Markets
Broader SupplierOfferings
Broader SupplierOfferings
IndustryConsolidation
IndustryConsolidation
New Approachesto Supplier
Relationships
New Approachesto Supplier
Relationships
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 price
Acquisition costs
Usage costs
End of life costs
26
$$Purchase
Price
Procurement Practices Supplier Best Practices
LeverageSupplier R&D Leverage
SpecificationsInventory Practices
Service Measures trackingTransactional Process
Remnant/Obsolete Practices
PerceivedOpportunity
ActualOpportunity
Across a Company’s boundaries:
Where do we get the benefits?
27
Identify Need Procurement Distribution Warehousing Disposal
Specification Receiving Application Out-of-Service
“Cradle to Grave” Costing
Total ownership costing of the supply chain
Analysis of the supply chain is done using a concept called Activity Based Costing
28
Sourcing Cost Model
ActivitiesCurrent Costs
Supplier #1
Supplier #2
Supplier #3
Cost of Materials $3,650,000 $3,200,000 $3,500,000 $3,700,000
Develop quarterly projections $18,450 $0 $0 $0Maintain vendor files $1,650 $550 $550 $550Supplier selection and contract maintenance $2,600 $600 $600 $600Placing orders with suppliers $1,900 $650 $650 $300Inspecting product $5,150 $5,150 $2,125 $0Transportation to districts $84,000 $84,000 $84,000 $0Accounts payable problem resolution $16,000 $3,500 $3,500 $3,500Warehouse handling costs $16,400 $16,400 $16,400 $0Material handling to sites $19,550 $19,550 $19,550 $0Inventory carrying costs $1,026,000 $380,000 $190,000 $0Transportation to job sites $104,000 $104,000 $104,000 $280,000Backhaul $121,500 $121,500 $0 $0Disposal costs for out of service material $39,500 $39,500 $0 $0Expedite orders $14,750 $7,375 $7,375 $7,375Cost of warehouse space $72,000 $72,000 $72,000 $0Obsolescence and damaged inventory $178,000 $178,000 $178,000 $0Cost to maintain specialized vehicles $62,000 $62,000 $62,000 $0
TOTAL COST $5,433,450 $4,294,775 $4,240,750 $3,992,325
Example
Example of Total Cost Comparisons
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
Broader territories will require stronger, more
strategic relationships
Broader territories will require stronger, more
strategic relationships
Supply chain synergiesare often key elements of M&A business cases
Supply chain synergiesare often key elements of M&A business cases
Strategic suppliers canbe key members ofan M&A joint team
Strategic suppliers canbe key members ofan M&A joint team
Sophisticated cost modelling is required
to understand customerand supplier cost savingsin an M&A environment
Sophisticated cost modelling is required
to understand customerand supplier cost savingsin an M&A environment
(Hot issue - Maintaining supplier diversity goals, while consolidating the supply base)
30
Broader Supplier Offerings and Strategic Supplier Relationships
The more value added services provided by a supplier, the more strategic the relationship
Typical Offerings Broader Offerings
As companies continue with the trend toward increased variable costs & outsourcing, strategic supplier relationships, along with broader offerings will become the norm
• Supplier Managed Inventory• Product training• Warranty utilization• Kitting
• Business process outsourcing• Full assembly or category vs. component sourcing• Combination of products and installation
31
Strategic Supplier Relationships In Action
32
Why Should Strategic Relationships Be Important to You?
Continuity of Supply - Especially During Tough or Volatile Times
A Single, Unbroken Supply Chain - From the Supplier Through to the Customer
Continual Dialogue - When Costs Go Up…and Down
Cost Performance Below Market Indices
33
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 conditions
– When markets are volatile
– To ensure alignment with strategic priorities
Raw Material Prices Rising: What Does This Mean to Energy Consumers?
Edison 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
Legislature
34
The Single, Unbroken Supply Chain
The Single Customer/Supplier Supply Chain
Supply Chain should be one single, unbroken chain from the supplier’s processes through the customer’s
Buyers must have the same expectations from themselves and their companies as they have of their suppliers
One weak link can disrupt the entire supply chain
ID NEED PROCUREMENT RECEIVING DISTRIBUTION MAINTENANCE DISPOSAL
SELL RECEIVE ORDER SCHEDULE/PLAN MANUFACTURE SHIP PAYMENT
35
Examples of Strategic Relationships in Action
$36M contract awarded based on Total Cost of Ownership in 1994, delivered originally 34% savings.
– Years 1994-2005, delivered an additional 12% TCO savings
– 2006 awarded 5th 3 year extension with 3% annual TCO goals included in the contract
While facing bankruptcy, only 1 of the 24 Strategic Suppliers to a $1.8B spend base changed terms or delivery options
When one Strategic Supplier faced pending bankruptcy, their major customer pre-paid their orders to help them with cash flow
When 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 up
Continuous improvement to reduce total supply chain costs is expected
Must be willing to look at costs and process for both the buying company as well as the supplier
Strategic 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 indices
Pricing volatility should be passed onto those customers that buy marginal capacity, not those who have firm, long term commitments
This applies to quality, service and total cost performance
38
Why Strategic Supplier Relationships are Important
1. A new supplier commences operations every minute
2. A supplier files bankruptcy every 8 minutes
3. A supplier ceases operations every 3 minutes
4. A judgment is filed against a supplier every 14 seconds
5. A supplier name change happens every 2 minutes
6. A supplier ownership change happens every 4 hours
7. A supplier’s risk profile changes every minute
…world of constant change and challenges (opportunities)
Source: Dun and Bradstreet
39
Q&A
40
For Further Information
Please contact
Dawn Tiura
President
Denali Consulting
530-448-0000 cell
530-550-5213 office
www.denaliusa.com
www.supplystaff.com