Abstract Number: 003-0012
Title of the Paper: Strategic Sourcing – Framework and Case Study
Name of Conference: Sixteenth Annual Conference of POMS, Chicago, IL, April 29 - May 2, 2005.
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AUTHORS
· Name: Juan S. Valencia
· Institution: Bright Logistics / University of Dallas
· Address: 10219 Panther Ridge Tr., Dallas, TX 75243
· E-mail:
· Phone: 214-837-7425
· Fax: 214-351-3863
· Name: Dr. Ehap Sabri
· Institution: I2 Technologies / University of Dallas
· Address: 5307 N. MacArthur #2013, Irving, TX 75038
· E-mail:
· Phone: 214-213-3324
· Name: Maria G. Gonzales
· Institution: University of Dallas
· Address: 2507 West Royal Lane # 705, Irving, TX 75063
· E-mail:
· Phone: 972-409-9272
· Name: Quynh Cao
· Institution: University of Dallas
· Address: 4905 Wildbriar Dr, Garland , TX 75043
· E-mail:
· Phone: 214-558-2248
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1. INTRODUCTION
1.1. Key Words
Strategic Sourcing – Supplier Relationship Management – Measuring Suppliers
1.2. Presentation Description
This paper provides a framework to help in implementing best practices of Strategic Sourcing process, and a good understanding of Supplier Relationship Management (SRM) sub-processes. It highlights strategies such as measuring suppliers and sharing information and benefits with strategic partners. Finally, a case study from a leather furniture manufacturing company is presented describing the benefits of implementing the solution.
1.3. Abstract
In the average manufacturing firm in the U.S., purchased goods and services account for 55 cents of every sales dollar. By contrast, direct labor in the manufacturing process accounts for only 10 cents (Tylley, 1995); therefore every effort in the sourcing process will have a huge impact on the bottom line.
Strategic Sourcing (S.S.) process is defined as an organized, systematic, collaborative way to identify competitive suppliers for longer-term agreements; but this process is hardly found in mid-size companies and it’s a manual process in large-size companies. S.S. is considered as one of the major supplier Relationship Management (SRM) processes.
This paper provides the best practice process for S.S., and a framework to implement S.S. solution successfully. Finally, a case study from a leather furniture manufacturing company is presented describing the benefits of implementing the solution.
1.4. Objectives
· Provide a good understanding of the As-Is Process of Strategic Sourcing.
· Identify the pain points for the process.
· Highlight the root causes for the pain points.
· Design To-Be Process that can eliminate the pain points and improve the performance metrics.
· Provide the potential value from implementing To-Be Process and new solution.
2. STRATEGIC SOURCING FRAMEWORK
2.1. Preface
To survive and prosper, some companies have formed linkages with their chief rivals while others have severed linkages with their closest friends. Seen one way, this has been a period of mergers, alliances, and outright acquisitions. Seen another, it has been a period of divestures, uncoupling, and re-couplings. Seen all ways, it has been a era of complexity (Laseter, 1998).
Nowadays, the goal of any company is to align its resources with customer’s demand in order to improve profitability, maximize customer satisfaction and achieve higher value-add than the competition. Value Chain Management (VCM) leverages the core competencies of all organizations in the value chain and supports the fundamental principles of operational excellence.
VCM is divided into Supplier Relationship Management (SRM), Supply Chain Management (SCM), and Customer Relationship Management (CRM). SRM goes straight to the difficult task of balancing supply with demand, and cost control with customer satisfaction (Bowman, 2002). The goal in SRM is to create, execute, and sustain win/win relationships with suppliers; it seeks to plug a communication gap at the other end of the supply chain (Bowman, 2002). On the other hand, SCM aims to optimize the flow of goods, services and information. Lastly, CRM intends to cover all customer needs throughout all phases of customer interaction. Strategic Sourcing, is an integral part of every business located at the SRM level. Every dollar saved by procurement goes straight to the bottom line (Hall, 2003).
Fig. 1
2.2 Definition
S.S. is a process of identifying the best sourcing approach to reduce cost and raw material supply risk, and to achieve a long-term relationship with suppliers, cutting procurement costs while increasing earnings. For every dollar a company brings in from sales, it spends anywhere from 10 to 30 cents of that dollar on indirect goods and services needed to run the business (Hall, 2003).
‘S.S. begins with aligning strategies with the business goals and objectives of the organization’ says Bob Shecterle, PeopleSoft’s Vice President of SRM. The ultimate goal is to make S.S. part of the regular, tactical business process (Foster, 2003). The biggest sources of cost are suppliers. For every dollar companies earn in revenue, they spend an average of 45 cents on external purchases. For commodity based businesses like metals and chemicals that, amount can top 60 cents (Bowman, 2002).
The S.S. approach abandons the adversarial relationships of the past in favor of stronger supplier participation. It goes beyond partnership to take a proactive position in order to take full advantage of the supplier’s capabilities, seeking mutual improvements on both sides. The new elements of S.S. approach are (1) the addition of the customer’s own capabilities through organizational change including cross-functional teams, (2) autonomy of the buying organization, (3) involving the entire organization beyond the procurement function, and (4) upgrading the procurement function. It requires flexibility based on trust between partners and sharing information. It also projects new roles such as bringing partners into new product development (Schary and Skjott-Larsen, 2002).
Krause et al. (1998) define it as: “…any set of activities undertaken by a buying firm to identify, measure and improve supplier performance and facilitate the continuous improvement of the overall value of goods and services supplied to the buying company’s business unit” (Schary and Skjott-Larsen, 2002).
2.3 As-Is Process
Billions of dollars are wasted every year because of inefficient procurement practices (Hall, 2003); therefore, developing a sourcing strategy is the first step toward managing S.S. (Gartner, 2001).
Currently, a S.S. decision should consider several factors such as strategic objectives, financial expectations, quality, price, risk, sourcing alternatives, available resources, and special skills needed.
The strategy might be different across different products; this criteria (strategic guidelines) are communicated to the engineers and buyers/purchasing analysts. For example, for class A products, quality is the criteria when purchasing raw materials; for class C products, price is the criteria when purchasing raw materials/parts. The current practice is done either using excel spreadsheet or it’s not done at all.
Currently, ‘Every company leans on the supplier to get the lowest price, but the real value comes from getting the supplier involved early in the sourcing process, ideally at the design stage’ says Michael Adam-Sampson, vice president of Product Strategy for MatrixOne (Foster, 2003). During the 1990s, purchasing has emerged as a business area worthy of executive-level attention. With outside purchases of materials and services accounting for so much of a typical company’s cost, the surprise may be that it took so long for purchasing to reach the CEO’s agenda. After all, as far back as 1982, Peter Drucker identified the opportunity: ‘Nowhere in business is there greater potential for benefiting from interdependence than between customer firms and their suppliers. This is the largest remaining frontier for gaining competitive advantage; and nowhere has such frontier been more neglected’ (Laseter, 1998).
Some companies already have recognized the importance of S.S. They have even implemented different programs where they reward vendors due to excellence in their performance. An example of this is Toshiba’s reward program; it targets those suppliers responsible for 80 percent of Toshiba annual purchases. Toshiba’s program rewards suppliers that meet targets with business guarantees, increased volume of business, public recognition, honors banquets, developmental preference in new product development, and performance awards. All of this translates to cost savings. Toshiba weighs each benefit a supplier provides at a certain percentage. It depends on its relative importance to Toshiba’s business. Similar programs gave Chrysler Corp $259 million savings in 1993 with 91% of suppliers participating. Chrysler’s program is based on rewarding suppliers who agree to participate as partners rather than adversaries. The program is design to be beneficial to both vendor and buyer. GM also offers a similar program online.
‘We were wary, our experience with these so-called partnerships was that they are one-sided and put suppliers at the mercy of their customers’ say Jerry Muller from Smurfit; ‘but after all our goals were the same, to have a quality partnership with open communication; we achieved that by sharing supply chain and logistics information and processes’ (Bender, 2000).
For a company like Ford, that has 600,000 part numbers in inventory, drawing 5,000 suppliers and serving 15,000 dealers worldwide, including 5,400 dealers in the United States (Bowman, 2004), the S.S. subject has been growing in the last ten years as a competitive advantage and a source of enormous savings. The company generates 120 million order lines per year through 63 distribution centers, 21 of them in the U.S. now and 24 by the middle of 2004 (Bowman, 2004). With this picture in mind, it was a priority for Ford to improve their S.S. system.
The emphasis in current writing appears to be on process more than on the direction of development per se. Krause et al. differentiate between “reactive” and “strategic” approaches. Reactive suggests ad hoc efforts to remedy specific problems, while strategic identifies key commodities and suppliers, to anticipate problem areas (Schary & Skjott-Larsen, 2002).
2.4. Pain Points
Even though there has been some improvement in the last decade in the S.S. field, ‘most companies still spend two thirds of their procurement time performing POs’ says Chris Sawchuck, director of e-procurement for the consulting firm AnswerThink (Foster, 2003).
The pain points currently found in the S.S. area begin with the inability to identify/manage total supplier spend and demand because of complex disconnected purchasing systems and different systems used for Engineering. Another pain point commonly found is the inability to consider supplier performance or AVL during sourcing decisions by engineers or buyers/purchasing analysts. Lastly, toxic data (missing fields like description and dimensions, or duplicate part numbers for the same part), and incomplete and fragmented data, limit the ability to identify and purchase right part from right supplier.
For Imagepoint, a signs related company headquartered in Knoxville, TN, their main focus was to keep cost in line while handling a very wide and diverse customer base with a product that is engineered to order or custom built. As Steve Hammond, CIO of ImagePoints says ‘we have a high number of low-volume builds. We can’t just stock a lot of raw materials because we have a different mix of the materials we need from week to week. We can’t afford to pre-buy and keep everything on hand like safety stock; one of our goals was to reduce the time it takes to get raw materials to our plants. We didn’t have a standard list of components that were used across all of our sign families. We didn’t have standard of business or purchasing practices across all the plants. Purchasing was focused on administrative activities’ (Murphy, 2004).
In another study, Toronto Hydro Corporation exposed several pain points starting with inefficiencies and redundancies in their sourcing process. The Canadian company wanted to reduce inventory, increase visibility of its value chain, and achieve full return on investment (I2 Technologies, 2002).
It can also be found that companies are out to modernize a system that’s driven by manual, paper-intensive processes (email, phone and fax). Most have too many vendors for their production parts and basic supplies. They lack the means to identify the best partners and adjust spending plans accordingly (Bowman, 2002).
For instance, before Ford improved their S.S. process and implemented their revolutionary program, a given service part could spend 87 days in the aftermarket chain, moving from supplier through packager, warehouse, dealer and on to the customer, says Steve McKelvey, Ford’s Business Technology Manager (Bowman, 2004). The study performed at Ford showed that their previous system didn’t take into account the special characteristics of each part; such as where it was needed, how fast it typically moved or how critical was its nature. Most importantly, customers were waiting too long for the parts needed to fix or maintain their cars (Bowman, 2004).
2.5. To-Be Process
The To-Be Process for S.S. should provide Supplier Spend/Demand analysis, and allow consolidation of enterprise spend/demand across disparate systems, in order to leverage total commodity spend and gain enterprise buying/negotiation power.
A S.S. solution should also perform contract analysis which allows the user to compare the expected consumption on the contract versus the actual one, and look for any saving opportunities by analyzing the contract terms (i.e. if the demand exceeds a certain limit, a price reduction can be achieved).
It should support commodity allocation (i.e. Supplier A has 70% of the commodity demand while supplier B has only 30 %). Its main objective is to make suppliers perform better as they go along so you don’t have to constantly replace suppliers (Foster, 2003).
The To-Be process of a S.S. solution must be able to reduce the number of overall suppliers in the supply base by allowing comparing alternative suppliers and selecting the best suppliers. It should also support design, sourcing, negotiation and procurement using a single user interface with flexible and configurable workflows. It also must allow analyzing supplier performance (slice and dice by site, commodity, time, supplier, and KPI).
It should include the capability to rationalize different metrics, come up with a given performance rating for each supplier, and roll these ratings back into the system as an input into the strategic source process (Foster, 2003). ‘SRM has to be integrated with other supply-chain technologies, such as traditional planning and forecasting applications, as well as with those involved with R&D’ says Randall E. Berry, a partner in Accenture’s Supply Chain Service group (Foster, 2003).