Strategic , Strategic Sourcing .

Many of the initiatives associated with strategic sourcing - dividing spend into categories of critical importance, establishing differing metrics for different levels of suppliers - are in place at some leading organizations. So, what is on the horizon for this aspect of the purchasing and supply field?

Let's start with the well-known quadrant that divides suppliers into four categories, based on amount of spend and criticality of the product or service. Typically, the most important buys with the most complex suppliers fall into the "strategic" quadrant. Now imagine that box divided into even more specific categories. There will be some strategic suppliers with whom relationships are formed, based on their ability to refine existing processes for cost reduction and cost saving objectives. Process improvements and integrated relationships that add value are stressed. But, there will be other strategic suppliers with whom the objectives are something different entirely. They will be chosen based on their ability to create joint ventures with the purchasing organization, resulting in a whole new source of business.

For example, imagine you're choosing a software provider, with whom you'll be establishing a strategic relationship. But you're not only looking at the provider to develop customized solutions that you know will bring value to your organization. You enter into the relationship with the full intention that at some point, your organization and the supplier organization will take that new product or service - developed through team effort - to market together, providing both organizations with a whole new source of revenue. A supplier chosen for that purpose was certainly sourced strategically.

Identifying suppliers who can take on partnership or alliance responsibilities is daunting. Those who sign up the right partners, however, are setting up the potential for sharing enormous dividends. Workable relationships involve a willingness to share risks and build new business models with partners. When a purchasing and supply organization attempts breakthrough innovation for marketplace advantage, it is critical for partners to share common goals. Prospects for successful change are as dependent on the lead organization as on its supplier partners. New collaborative partnerships are partnerships of equals. Supplier partners that fail to move the innovation curve will ultimately be replaced with partners who do.

Beyond strategic sourcing, those who are willing to move away from traditional operating modes soon learn an important lesson: Building relationships inside and outside the organization is an ongoing process.

"We do everything by the book in terms of sourcing, but we are still focused on the old procurement world," groaned one procurement professional recently. "We still lack the skills to trust our suppliers and to build the kind of relationship where there is give-and-take and where new ideas flow." For the organization that can create supply advantage - that can build the necessary relationships and get ideas flowing - the rewards will include competitive advantage as well as the opportunity to see competitors like this one only in its rearview mirror.

What Management Wants From Purchasing

Cost Savings – Management wants Purchasing to save money. But successfully achieving and reporting cost savings requires a careful approach. Be sure to align your definition of cost savings with management’s definition, track your cost savings, and focus on total cost reduction, not just price reduction at any cost.

Productivity Improvements – Management will always expect you to do more work with fewer resources. No matter whether you’re in a tactical or strategic purchasing organization, there are many productivity metrics that you can choose from to track productivity gains: PO’s per buyer per day, average length of sourcing cycle, man-hours per dollar saved, etc.

Brand/Differentiation Support – Your organization’s mission or vision statement should give you some clues as to how your organization wants to be perceived in the marketplace and how it wants to be differentiated from its competition, such as offering higher quality, faster cycle time, better service, lower cost, or something similar. Make sure that your decisions and metrics support your management’s brand and differentiation strategy. As brainless as this sounds, you’d be surprised how many organizations have a mission of being the “highest quality provider” in their industry, yet their purchasing departments measure only cost savings.

Customer Satisfaction – Sometimes, being in purchasing can make you feel separated from your organization’s customers. But management relies on things that you’re responsible for, like assuring continuity of supply, to keep its promises to its customers. Realize that you can personally be responsible for your organization’s failure to meet customer expectations. In this day of tough competition, organizations simply have to meet customer expectations to survive and you have a critical role in that survival.

Positive Cash Flow – In some organizations, the timing of monetary receipts and payments is critical. Those organizations cannot afford to have more cash leaving the company than coming in during certain periods. Be aware of that and negotiate appropriate terms with your suppliers. But don’t just pay them late and hope that they don’t notice like some organizations do!

THE CHALLENGE AUTO COMPONENTS SUPPLIER GOES LEAN WITH RFID

Automate the receiving of eight truckloads of  parts from 160 suppliers daily to reduce cycle times and costs

Continental Automotive is one of the world’s leading suppliers to the automotive industry, employing about 150,000 people in 36 countries. The huge Huntsville plant alone runs thirteen 600-foot assembly lines for two to three shifts per day. Those operations include the manufacture of powertrain components, transmissions, engine controllers, automotive infotainment systems, body controllers, “and a variety of electronics that go into a car,” according to Dr. Gokhan Sarpkaya, Project Leader for Logistics at Continental Automotive. Several years ago, Continental launched its lean manufacturing initiative, intended to identify ways in which the company could improve its manufacturing processes. As part of that initiative, the plant is converting the existing lines into lean manufacturing cells. To feed the assembly lines and cells, the Continental facility each day receives eight truckloads containing some 5,000 types of electronic and mechanical parts originating from about 160 manufacturers. Continental receives those supplies directly from its three third-party logistics suppliers, who receive them from the manufacturers.The logistics suppliers repackage the supplies using one or more of Continental’s 80,000 reusable containers or pallets, which are transported to the Continental facility. The personnel who receive the shipments have traditionally used bar-code scanners to check the incoming supplies against the shipping orders in the company’s SAP enterprise resource planning (ERP) system, while forklift drivers hunt for available space to randomly store the supplies until they’re needed. The containers and pallets are then moved to another on-campus, third-party firm that processes the empty containers and returns them to the logistics suppliers. In support of its lean-manufacturing initiatives, Continental identified the loss of supplies and containers as an opportunity to save costs. Shrinkage was one result of errors made because the locations of parts were noted manually. Time-consuming delays occurred if the advance-shipping notice sent by the logistics suppliers to Continental failed to match the parts that Continental actually received from those suppliers — or, if the advance-shipping notices failed to arrive in time for Continental to compare them to the shipments. Compounding these issues, it was too easy to damage bar codes on the shipments, which prevented accurate reading by scanners. The manual scanning of bar codes and the manual comparison of shipping notices to the orders in Continental’s SAP ERP system were time-consuming, nonproductive, and expensive processes that were inconsistent with the idea of lean manufacturing. Continental’s Sarpkaya and his colleagues had a clear mandate to address the challenges of managing incoming shipments. Lean strategy drove their decision to come up with a new solution for these processes to decrease the time required to scan bar codes manually, to reduce inventory inaccuracies caused by late shipping notices and human error, and to enable the company to track — and, thus, better manage — its 80,000 shipping containers.

Pulling Back the Curtain on Logistics and Purchasing Practices

Logistics, purchasing, and inventory management can be thankless jobs when everything goes according to plan. No one applauds when manufacturing deadlines are met, quality products ship on time, and workers have the right supplies.

But if deliveries arrive damaged, or low inventory halts production, executives pull back the curtain and discover who's to blame.

Bidding, negotiating, and contracting with suppliers present significant challenges in logistics and purchasing. Previously, few alternatives existed to traditional, often cumbersome, paper-based systems. Today, however, buyers and suppliers have access to a powerful tool for enhancing relationships, streamlining the purchasing process, and cutting costs by as much as 32 percent.

That alternative is eSourcing. eSourcing refers to web-based negotiation tools that allow buyers to automate the bidding process, while suppliers compete during real-time bidding events, such as reverse and forward auctions.

Through eSourcing, companies can:

• Realize average cost savings of eight percent to 32 percent on capital equipment, raw materials, and services.
• Compress the purchasing cycle from 75 percent to 80 percent, which results in reduced manufacturing and distribution time.
• Access a highly qualified pool of vendors from around the world, including those in low-cost regions. International companies can build vendor relationships in the local markets they serve, enhancing their buying power on a global scale.
• Procure higher-quality goods and services that deliver better end results to customers.
• Reduce administrative costs and time associated with the RFP/RFQ and bidding processes. eSourcing eliminates hard costs such as printing, postage, and handling, as well as the time required to juggle paperwork.

CONNECT TO SUCCESS

Here are five tips to help you lay the groundwork for smooth negotiations through eSourcing.

1. Balance reliability, quality, and price. eSourcing's ultimate goal is to develop a network of vendors who provide reliable, high-quality products, services, or materials at competitive prices. Buyers should gravitate toward eSourcing's multi-attribute scenarios, which evaluate suppliers based on quality, reliability, and value-added services, in addition to price.

A logistics manager, for example, could evaluate trucking companies not only on cost-per-ton shipped, but also on expertise handling hazardous materials.

Buyers who rank their priorities for each factor before they develop specifications, then keep them top-of-mind while evaluating bids, will be more satisfied with the end results. Suppliers will appreciate the chance to showcase their competitive differentiators.

2. Establish clearly defined and relevant purchasing specifications. By developing clear requirements and expectations for the products and services they purchase, buyers ensure a true apples-to-apples comparison.

Buyers can further enhance the bidding process by encouraging suppliers to ask questions and seek clarification. This deepens relationships that net better outcomes and gives suppliers a chance to quickly identify the most promising business opportunities.

3. Pre-screen suppliers to ensure high-caliber options. While eSourcing offers unlimited access to worldwide vendors, the challenge comes in weeding out those who are not qualified or are not the best fit for a given sourcing situation. By identifying high-quality suppliers prior to negotiations, buyers choose the one that offers the best mix of value, price, and pre-determined requirements.

Pre-qualification factors may include:

• Value-added services
• Years in business
• Revenue
• References and certifications
• Locations
• Immediately available inventory

The end result is a manageable, highly qualified pool of vendors.

4. Determine appropriate bidding guidelines in advance. Open negotiations allow suppliers to see what their competitors are actually bidding, whereas closed negotiations show suppliers where they rank in the process. Suppliers can be uncomfortable with open bidding because they do not want to divulge pricing to competitors. Suppliers choose the negotiation type they are most comfortable with to attract a larger group of interested vendors.

5. Use eSourcing strategically. Not every purchasing or logistics situation is appropriate for eSourcing. Products or services commonly sourced online include commodities and general operating supplies, packaging and containers, commercial transportation, courier services, international freight, or liquid and temperature-controlled goods. eSourcing tends to be less appropriate for procuring highly customized or regulated products and services, or for complex buying processes.

A good rule of thumb is to utilize eSourcing for standard, rather than specialized, products or services.

In an era of stiff competition, factors such as quality, reliability, efficiency, and developing strategic relationships between buyers and suppliers are often just as important as achieving cost savings. eSourcing allows logistics, purchasing, and inventory managers to be professional wizards who pull back the curtain to reveal a procurement process beneficial to all parties involved.