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Week 11 Procurement 2 - TCO supplier relation management -…
Week 11 Procurement 2 - TCO supplier relation management
Procurement
VMI and CPFR
VMI is a process through which the supplier rather than the customer manages the flow of product into the customer’s operations.
VMI is an approach for close cooperation between a supplier and a vendor, based on trust.
To minimize the dependence on supplier for replenishment P&G and Walmart developed the CPFR – a collaborative replenishment process.
Collaboration tools focus on sharing information to achieve supply goals through better CPFR results and support VMI (SMI).
What happens in this process (P&G-Walmart)
Continuous replenishment is a supply chain relationship in which a vendor/supplier continuously monitors the inventory of Wal-Mart and automatically replenishes the inventory when levels hit the re-order point.
The difference btw VMI and CPFR is that in CPFR parties took joint decision of estimating demand and signing off the production.
The advantage P&G is having more advanced warning of product demand. And they produced based on an agreed plan.
The advantage to Wal-Mart or distributor is minimizing inventory costs and avoiding stock outs.
CPFR
The real challenge to widespread adoption of CPFR is that it requires a fundamental change in the way buyers and sellers work together.
Companies must ensure that their information technology systems, organizational structures, business processes and internal data are conducive to implementing CPFR.
Another critical issue ensuring data security and confidentiality.
SRM implementation
challenges&issues when implementing SRM
too much focus on costs instead of value
lack of specific SRM competencies and skills
strategic objectives that are not compatible
No alignment between the business and procurement
open communication and information sharing is difficult
Focus on fighting instead of collaborating
ignorance of soft skills to manage business relationship
lack of business involvement in managing the relationship
limited engagement and sponsorship from top-management
lack of mutual understanding and empathy
other
Building the supplier base
high profit；high supply risk
strategic items
development of long term relationships
collaboration and innovation
abundant supply
high profit ;low supply risk
leverage items
exploitation of full purchasing power
targeted pricing strategies/negotiations
abundant supply
low profit; high supply risk
bottleneck items
low control of suppliers
innovation and product substitution and replacement
abundant supply
low profit; low supply risk
non-critical items
product standardization
process efficiency(automated purchasing eg,catalogues, e-tendering)
abundant supply
Procurement process
purchase requisition
reviewed by procurement/finance team
reject
send back to the initiator with the reason for rejection
approve
create purchase order
send out multiple requests for quotation(RFQ)
analyse&select vendor
negotiate contract & send PO
Receive Goods/Service
Receive&check invoice ( 3 way matching)
authorize invoice &pay vendor
Done---don't forget to make a note of the payment in the cashbook
Procurement System
Secret #5 Supplier Segmentation
Secret #4 Negotiation Games
Secret #3 Watching and reporting savings
Secret #2 Integrating Value into Supplier Selection Matrix
Secret #1 What will get the CPO Fired or Promoted?
reducing supply risk scores almost as high as reducing costs (even in the midst of a recession)
bringing in important innovation from the supplier network
When selecting a Procurement System
must-have features of a procurement system
spend control
on-the-go approval
risk management
easy integration
insightful reports
simple customization
pre-built templates
interactive dashboards
SAP Procurement process flow
determination of require
source determination
vendor selection
PO processing
PO monitoring
Goods receipt
Invoice Verification
Payment processing
Future of procurement
Procurement has grown significantly to a more strategic process over the past twenty years—now, digital supply chain management and analytics are bringing new strength to that strategic role.
five key shifts
value drivers
----cost savings and risk mitigation---execution speed and business insight
corporate function drag
data scrutiny
asset life
regulatory fragmentation
procurement's role
----sourcing executor---sourcing advisor
corporate function drag
eroding process ownership
business role
----procurement, customer---disciplined sourcing agent
eroding process ownership
winners take all
delivery model
---standalone corporate function---hybird center of excellence
eroding process ownership
resources
----execution staff and core technology---professional advisory staff and customer-oriented technology
pervasive digital capabilities
eroding process ownership
war of talent
Ten key trends for procurement 2020
Supplier relationship management as a core competency
Prioritizing value creation over price management
Transfer of innovation strategy for supply chain success
Focus on portable manufacturing
Product and workforce back up for business contingency
internal and external collaboration at the business forefront
Aligning business strategy to supply chain
Prioritizing distribution, logistics, and asset management
Agility, flexibility, integration, transparency, and alignment will dominate the competition
Shorter product life cycles
Deployment of digital technologies in procurement (Deloitte)
Core
:solutions that are already procurement mainstays; larger systems with longer implementation
spend analytics
eSourcing
Electronic Catalogs
Contract management
supplier information management
eProcurement
eInvoicing
eAuctions
Maturing
: Solutions that are transforming procurement with minimal investment
cognitive computing/artificial intelligence
intelligent content extraction
predictive/advanced analytics
visualization
collaboration networks
crowdsourcing
3D printing
Robotics
Emerging: Solutions that could impact procurement in the future
block chain
sensors/wearables
cyber tracking
virtual reality/spatial analytics
What is Blockchain ?
A blockchain is a decentralised database managed by multiple participants. Is also known as Distributed Ledger Technology (DLT).
It consists of various consequent blocks. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
For businesses, blockchain holds the promise of transactional transparency – the ability to create secure, real-time communication networks with partners around the globe to support everything from supply chains to payment networks to real estate deals and healthcare data sharing.
Blockchain (DLT) properties
programmable----a blockchain is programmable( eg, smart contracts)
secure-----all records are individually encrypted
anonymous----the identity of participants is either anonymous or pseudonymous匿名的
unanimous----all network participants agree to the validity of each of the records
time-stamped-----a transaction timestamp is recorded on a block
immutable----any validated records are irreversible and cannot be changed
distributed----all network participants have a copy of the ledger for complete transparency
how blockchain works
a transaction is requested
a block that represents the transaction is created
the block is sent to every node in the network
Nodes validate the transaction
Nodes receive a reward for the proof of work
the block is added to the existing blockchain
the transaction is complete
SCM and Blockchain
implementing blockchain in supply chain
supplier management----transparency in the bidding process thanks to a record of every transaction
preventing fraud-----fraudulent entries will be detected by an absence of hashing in the blockchain
smart contracts----blockchain ledger verifies when a conditions is met and auto-executes terms
traceability----track the movement of goods of the supply chain
ledger trust----multiple verifications ensure suppliers and customers are on the same page
Benefits of Blockchain for procurement
Smart contracts
Enhanced purchase order management
Supply chain visibility and traceability
Real-time settlement
Transparency in documentation
No need for paper documents for accounting and customs clearance!
Total cost of ownership (operation) - TCO
TCO
initial cost
cost of operation
cost of maintenance
cost of downtime
cost of production
remaining value
Total Cost of Ownership Approach
actual opportunity
perceived opportunity
purchase cost
demand drivers
delivery risks
quality costs
environmental issues
maintenance expense
freight
specifications
stabdardization
inventory practices
procurement practices
warranty terms
warehousing practices
disposal/salvage practices
operational practices
Total Cost of Ownership is a structured approach for determining the total costs
associated with the acquisition and subsequent use of an item from a given supplier.
TCO is a comprehensive approach that goes beyond price to consider a number of other costs.”
Total Cost of Ownership Mindset
Move away from looking at just lowest price
More focus on best value (which is different by company/business/product family)
Move towards process improvement as a measurable internal goal (all parties)
Evaluation of all factors that make up the cost of goods and services
“To use cost of ownership analysis as a cost-reduction tool, it is necessary to identify and analyze the cost drivers to look for any avoidable costs.
TCO of a commodity goes beyond purchase price, it also includes acquisition costs, lifecycle costs, end of life costs and others.
TCO of a commodity price
TCO of a commodity goes beyond purchase price, it also includes acquisition costs, lifecycle costs, end of life costs and others.
For some commodities, cost elements beyond purchase price may be significant, at times equaling or exceeding initial purchase cost over the commodity lifecycle
purchase price=supplier's profit+supplier's cost
acquisition process costs=bid&award costs+contract management costs
lifecycle costs=management costs+operation costs
end of life costs=disposal/closeout costs
total cost of operations=disposal/closeout cost+management costs+operation costs+bid&award costs+contract management costs+supplier's profit+supplier's cost
Different commodities can vary significantly in their composition of TCO elements
Many buyers will focus on achieving a competitive purchase price and will overlook opportunities to improve other cost elements
For some commodities, purchase price is not the largest cost element
Therefore, it is important to consider all cost elements, including (but not limited to)
internal procurement, contract management and billing/invoicing processes
Internal management of the commodity
Operational costs (cost of use, spare parts, maintenance, etc.)
Disposal costs
Cost Driver Framework
Design
Costs attributable
to product design tradeoffs
Material specifications • Product-line complexity
Facility
Costs related to the size of the facility, equipment, and
process technology
Facility scale
• Degree of Vertical Integ. • Use of automation
Geography
Costs associated with the location of the facility
relative to customer
Location and wages • Transportation costs
Operations
Costs that differentiate a well-run facility
from a poor one
Labor productivity • Facility utilization • Reject rates
total cost of a commodity involves the identification of cost elements and cost drivers
Cost drivers can at times be significant sources of savings for some commodities
Drivers of cost within suppliers’ operations can be very important for commodities where unit price is still likely to be the largest component of our total cost
COST ELEMENTS
Components of total cost of operations (TCO) – “buckets” of cost that can be quantified
Transportation costs
Purchasing administration
costs
Inventory costs
Supplier certification costs
COST DRIVERS
Factors or activities that can be changed and have an impact on the magnitude of the cost element
Distance shipped
Number of suppliers
Number of purchase orders
Number of different SKUs
savings calculation framework--total cost
Reduction in Cost per Unit
Reduced Prices
Price
Volume Rebates
Payment term discounts
Reduced Supply Chain Costs
Cost of Capital
Warehousing Costs
Shipping costs
Reduced Lifecycle Costs
Maintenance costs
Operating, energy and other costs
Disposable costs
Change in Consumptio n/ Volume
Improved Operating Efficiency
Reduced Procurement Related Operating Expense
Elimination
Substitution
Change in mix
Reduced Non- Procurement Operating Expense
Cost of processing purchase orders
Cost of processing accounts payable
Cost of receipt/warehousing
Other Operating efficiencies
Summary of the day
Collaboration btw supplier and buyer is critical for effective inventory management as well as customer responsiveness in FMCG business.
VMI is mostly exercised in manufacturing industry btw technologically enabled compaies.
Procurement and SRM is becoming a strategic role in the sustainability of companies/businesses.
CPO should have a clear view on the total cost of ownership when evaluating the alternatives.
Also procurement is becoming a digital acivity by adopting online tenders, crypto currencies and blockchain ledgers.