World Class Strategic Sourcing The Deloitte approach to optimise supply and procurement

1. The new procurement environment

Index

3. The Strategic Sourcing process

4. Final Words

2. Overview of Strategic Sourcing

Procurement has become increasingly sophisticated in order to drive margin improvements

• Procurement function mainly contract administration function

• Procurement and contracting decisions highly decentralised

• Vendor base fragmented

• Vendor relationships “incestuous”

1st Wave Strategic Sourcing

• Centralised negotiations

• Fewer suppliers

• Competitive bidding process

Demand Management

• Standardised specs

• Policy/procedures outlined

• Some monitoring and tracking

2nd Wave Strategic Sourcing

• Abolition of “sacred cows” e.g., Marketing, IT functions, Legal

• Cost management imperative

Matrixed procurement function

• Procurement shares responsibilities with centers of competence

• Responsibilities by the various parts of the organisation clearly defined

Effective “end to end” procurement management

• MIS allows unit/price tracking

• System allows “policing” of compliance

• Disbursement management

• Service and quality improvement

Relative Efficiency

Up To Late 80s 90s New Millenium

Procurement(“In The Basement”)

Sourcing(Easier cost improvement lever)

Supply Chain Management(Source of sustainable total cost advantage)

1. The new procurement environment

Index

3. The Strategic Sourcing process

4. Final Words

2. Overview of Strategic Sourcing

5

Overview of Strategic Sourcing

• Procurement represents a significant opportunity for improving value for money by reducing costs.

• Currently procurement activities are executed on an ad-hoc basis with minimal contract coverage

• Strategic sourcing will assist us in choosing suppliers, allocating volumes among suppliers, managing supply risk and optimizing the supplier base performance, focusing on total cost of ownership

• The primary objective is to develop a number of strategic supplier contracts with preferred suppliers, ensuring that our purchasing power is utilized to the maximum extent

• A strategic sourcing review will be conducted on the materials and services making up our annual projected expenditure including a detailed spend analysis, market analysis, strategy development, bid solicitation and evaluation and will result in the implementation of organisation wide supply contracts.

Why Strategic Sourcing?

Strategic sourcing will assist us in choosing suppliers, allocating volumes among suppliers, managing supply risk and optimizing the supplier base performance, focusing on total cost of ownership

Increase Shareholder Value

Operating MarginRevenue Growth Asset Efficiency Expectations

Increased emphasis on continuous proactive performance management

Established culture on operational excellence

Improved agility and flexibility of partner Organisations and networks

Optimise asset efficiency

Improved terms on materials

Increased use of supplier managed inventory

Consolidated inventory

Increased clientsatisfaction due to better service / quality of procured items

Improved contractingand negotiating skills of staff

Improved relationshipswith suppliers

Increased compliance, compatibility and standardisation

Increased emphasis onSupply Chain Management

Improved Communication and Coordination with suppliers

World class procurement organisations must contain the following

Strategic sourcing activities provide short-term savings, however a holistic and comprehensive view of Procurement and Compliance must be adopted in order to capture and sustain savings, and minimise cost of

non-compliance

Organisational Value

Demand Management

Procure to Pay

Supplier Management

Procurement Vision and Strategy

Integrated Procurement Information

Change Management/Knowledge Management and Training

Compliance

Integrated Measures, Tracking, Recording & Reporting Infrastructure

Alig

ned

Sup

ply

Chain

org

anis

ati

on

Value Creation

Ongoing Operations

ProcurementInfrastructure

Top Management Sponsorship

Mandate Empowerment Accountability & Incentives

InventoryManagement

Strategic Sourcing

Preferential Procurement

Timelines

Month Municipality Budget Year

Mayor and Council/Entity Board Administration – Municipality and Entity

July Mayor begins planning for next 3 year budget Senior officials of municipality begin planning for next 3 year budget

August Mayor tables in Council a time schedule

September Council through IDP process reviews strategic objectives

Budget offices of municipality determine revenue projections and proposed rate and service charges

October Demand Planning including strategic sourcing

November Demand Planning including strategic sourcing Accounting officer/municipal manager reviews and drafts changes to IDP

December Council finalises tariff Consolidate and prepare proposed budget

January Approval and Submission of proposed budget for next 3 year budgets

Review proposed national and provincial allocations to municipality

February Council considers municipal entity proposed budget Submit proposed budget to Mayor

March Mayor tables municipality budget Publish tabled budget, plans and proposed budget and plans for next 3 year budgets

April Consultation with national and provincial treasuries Revise budget documentation in accordance with consultative processes

May Consider approval of budgets Assist Accounting officer in preparing final budget Demand Management

June Approval of budgets and SDIP Accounting officer submits to the Mayor and Council

Schedule of timelines in accordance with the PFMA and MFMA. Strategic Sourcing underpins Demand Management and thus needs to fall into the same types of timelines. MFMA example given

• Skills Availability– Limited skilled resources within the Supply Chain area

– Retention of limited skills not easy

• Requirement to cut costs and at the same time improve current business performance

– Need to build capability with current staff and maintain momentum around improvement initiatives

• Limited collaboration across the supply chain (internal & external)

• Visibility and cooperation across the supply chain

• Ability to embed supply chain improvements within the organisation

• Adoption of world class technology and systems that are readily available to support process improvement

South African Challenges

South African Organisations are faced with a number of constraints that need to be addressed when designing and optimising their supply chains

1. The new procurement environment

Index

3. The Strategic Sourcing process

4. Final Words

2. Overview of Strategic Sourcing

The Sourcing & Procurement “Hot” topic

• Purchasing comes down to two activities: – Sourcing: includes all activities related to establishing and managing purchasing contracts

– Procurement: includes all activities related to identifying and fulfilling an actual purchasing need.

– Supply relationship management: Develop mutually beneficial relationships

Strategic Sourcing initiatives have resulted in significant benefits being obtained for organisations by focusing on a total cost of ownership approach to procurement

CreateRequisition

Award

Payment &Settlement

SourcingProcurement

IdentifyNeed

Create PurchaseOrder

Shipping

ReceiveGoods/

Services

AssessOpportunity

Assess InternalSupply Chain

Assess SupplyMarket

Execute Sourcing Strategy

Define Sourcing Strategy

SupplierRelationshipManagement

Create/Refine Supplier Groups

Initiate Relationship

DefinePerformanceExpectations

ManagePerformance

AssessRelationship

Institutionalise Sourcing Strategy

Go to tender and evaluate

Strategic Sourcing & Procurement

Purchasing has been getting a bad reputation due to missed deadlines, failed projects and broken savings promises. However, there are companies that have successfully transformed their purchasing function and

created value along the way.

Wouldn't it be cool if ...

• Corporate purchasing helped to increase shareholder value

• I could tell my stakeholders a success story about our purchasing activities

• Purchasing supported an increase in cash flow

• I could influence demand and specifications of goods/services that we procure

• I had qualitative information about our suppliers for contract negotiations

• I could drive down TCO (Total Cost of Ownership) through purchasing initiatives like strategic sourcing

Reality

• Profitability declines due to increasing operating costs

• No visibility of how or if purchasing contributes to shareholder value

• It seems we are investing lots of money in purchasing projects but I have yet to see a positive ROl

• Collecting basic spend data takes forever and data is not reliable

• NO view on who my most important suppliers are and what my relationships with then should look like

Strategic SourcingStrategic SourcingStrategic SourcingStrategic Sourcing

Level of

Ad

ded

Valu

e

Time Line (potentially 3-5 Years)

Buying

Procurement

Partnership

Alliance

World Class

• Needs not anticipated, data not available or not used• No organisation wide procurement strategy, large supplier base• Transactional focus • Procurement provides ad-hoc tactical support• Low skills and resource, little career planning

• Some category strategy creation, but not company wide, and not communicated effectively• Volume leverage through effective use of competition across categories• Track commercial measure of performance, targets for savings• Technology enables i.e. purchase to pay cycle improvement through automation• Selected supplier base consolidation• Training and recognition of skills required

• Formal Planning processes• Focus on SRM and sharing business plans• Longer term, bigger value contracts with fewer suppliers• Collaboration on cost improvement, increased levels of risk sharing• Trained and qualified resources supporting all categories of spend• Key Performance Indicators in place.

• Procurement strategy aligned to corporate strategy• Suppliers selected for strategic fit and deliver continuous improvement• Data driven decision making• Full support over purchasing cycle • Risk sharing higher with the organisations co-located and jointly financed• Business planning optimises all commercial aspects, tax, investment, people

• Strategy fully supports the corporate goals and driven by corporate consensus• Managing the supply risk while leveraging the competitive strengths• Nurturing supplier relationships • Supplier base share improvement target for cost and innovation added value• Full visibility and trust across the external value chain• Procurement maintains a rationalised supplier network that delivers technology, knowledge,

products or service quality superior to competitors

Stage I: Reacting

Stage II: Developing

Stage III: Advancing

Stage IV: High Performing

Stage V:Pioneering

A procurement function needs to work through the defined stages to achieve world class procurement capabilities

A sourcing engagement can affect many parts of an organisation. It is critical to identify and include the key affected groups in the process and develop a project management plan across all stakeholders.

Building the Team – Managing the Project

• Demand management or planning shall be a cross-functional exercise that bring the supply chain practitioner closer to the end user

• Determine current and future needs

• Formulate inputs for:

• Preparation of the budget

• Annual performance plan (PFMA)

• Annual operational plan (PFMA)

• Integrated Development Plan (MFMA)

• Service Delivery and Budget Implementation

Plan (MFMA)

• Acquisition Plan

• Champions for departments on process and

requirements

• Demand management or planning shall be a cross-functional exercise that bring the supply chain practitioner closer to the end user

• Determine current and future needs

• Formulate inputs for:

• Preparation of the budget

• Annual performance plan (PFMA)

• Annual operational plan (PFMA)

• Integrated Development Plan (MFMA)

• Service Delivery and Budget Implementation

Plan (MFMA)

• Acquisition Plan

• Champions for departments on process and

requirements

Inputs to the Project Management PlanInputs to the Project Management PlanWho should you include?Who should you include?

Assess Supply Market

The Strategic Sourcing Process

Define sourcing categories

1

• Document spend

• Stratify spend

• Identify and prioritize spend opportunities

• Cross functional team development

Assess Internal Supply Chain

32

• Identify demand drivers

• Perform specification review, gap analysis & standardisation review

• Perform supplier specification review

• Identify all related Total Cost activities

• Identify potential sources of supply

• Evaluate industry(ies)

• Identify viable sources of supply

• Perform supplier assessments

• Perform supplier comparisons

• Compile opportunities

• Brainstorm process enhancement and supply strategies

• Assess the feasibility of strategies

• Draft an action plan

• Communicate strategies

• Develop supplier solicitation strategy

• Implement supplier solicitation strategy

• Conduct supplier negotiation

• Develop process enhancement strategy

• Obtain final approvals

• Award contract

Develop Sourcing Strategy

4Execute Sourcing Strategy

5

• Vendor management• Transition to new

process• Develop supplier

relationships• Implement

operational changes• Establish joint

supplier/Enterprise process improvement team

• Monitor and report savings

• Monitor and report performance

Institutionalise Sourcing Strategy

6

Effective strategic sourcing requires a clear and logical approach to provide a transparent and objective analysis of supplier capabilities, thereby ensuring sustainable savings without compromising service.

Either a tactical or strategic sourcing approach can be adopted to deliver results

Strategic Sourcing

Volume Concentration

Best Price Evaluation

Global Supply Management

Product Specification Improvement

Joint Process Improvement

Relationship Restructuring

Increase Buying PowerIncrease Buying Power Create an AdvantageCreate an Advantage

There are a number of available sourcing strategies. Not every strategy will suit the same business situation. Depending on the maturity of the category, appropriate strategies should be selected to deliver results.

• Typically more complex categories – complex supply market and more complex products

• Highly detailed and looking at all areas of the supply chain

• Typically longer timescales than tactical sourcing

• Fewer quick wins

• Used when the category is well-advanced, the best price has been achieved

• “Traditional sourcing”

• Often for commodity items/categories

• Those with simple supply market

• Typically used if category has not been sourced previously

• The key objectives are to achieve the best price and rationalise the supply base

TacticalTactical StrategicStrategic

The scope of sourcing extends beyond supplier price negotiation and takes into account the total cost of ownership

Total Acquisition Cost

(Actual Opportunity)

Demand Drivers

Specifications Procurement Practices

Inventory Practices

Operational Practices

Decommissioning/ Disposal

Internal Policies & Procedures

Internal Processes

Management Systems

PurchasePrice

Amount paid to the Supplier

Factors generateadditional costs to

an organisation once an item is

commissioned and in use

World class companies demonstrate excellence across the three key components of a strategically focused procurement organization

World Class Procurement Capabilities TechnologyOrganisation

Process, Policies and Procedures

• Simple and consistent purchasing process• Clearly defined sourcing process and rules• Authority to drive compliance given to

Procurement• Ongoing focus on value analysis • Simple access to quality information• Focus on commodity management and

customer service• View of sourcing, ordering, and accounts

payable as one process (Source-To-Pay)

• e-Procurement• e-Sourcing• Measurement systems for

reporting• Transaction automation• Procurement cards• Project management tools

Status and perceived importance of the Procurement Function

Partnerships with key suppliers

Joint improvement teams

Cross-functional sourcing teams

Accountability for savings

Regional and local structure and responsibility

Critical Success Factors & Risks

Commitment by top management

Acceptance from the business line leaders e.g. Directors

Commitment of dedicated resources

Allocation of funds (budgetary consideration)

Qualified and motivated personnel

Support from related disciplines

Enabling tools (use of e-technology, ERP / GSS)

Ability to track, capture and measure the benefits

Transparency within the evaluation and adjudication process

Confirm savings targets

Organisation’s reputation in the marketplace may result in supplier resistance

Ability to enable change of behaviour within the organisation

Monitor and reward top performance

The following critical success factors and risks have been identified as key levers to successful Supply Chain Optimisation :

1. The new procurement environment

Index

3. The Strategic Sourcing process

4. Final Words

2. Overview of Strategic Sourcing

The Truth about Strategic Sourcing

Truth 1: It's powerful if you get it right

Truth 2: Cost will always keep creeping back in

Truth 3: It's not rocket science

Truth 4: Money on the Table ≠ Money in the Bank

Truth 5: Direct Purchasing ≠ Indirect Purchasing

Truth 6: It's not just about Price

Truth 7: A Commodity ≠ Commodity ≠ Commodity

Truth 8: Information is all you need

Truth 9: Only measured results are good results

Truth 10: It's not about Technology

Contacts

If you have questions regarding strategic sourcing:

Katherine Levy082 602 4107katlevy@deloitte.co.za

Riana Bredell082 578 6338rbredell@deloitte.co.za