Strategic Sourcing Makes an Impact! David H. Vargas, Purchasing Manager Sikorsky Aircraft 203/ ;

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1 Strategic Sourcing Makes an Impact! David H. Vargas, Purchasing Manager Sikorsky Aircraft 203/ ; Abstract. Learn how Sikorsky Aircraft, a world leader in the design and manufacture of advanced helicopters for commercial, industrial and military markets impacts its bottom line through strategic sourcing. Dominant strategies that have emerged include leveraged spend, increase in value-added work content, procurement of higher-level assemblies and value engineering. The audience will learn about Sikorsky s Eight-Step Strategic Sourcing Process and practical analytical tools utilized to develop tactics and manage implementation through to the bottom line. If you are involved in a complex industry, responsible for strategic sourcing and impacting bottom line results you should attend this session. What is Strategic Sourcing. Strategic sourcing will reduce the total costs of externally purchased materials, goods and services while maintaining and improving levels of quality, service and technology. There are three (3) underlining principles; first you must define the total value of the relationship between the supplier and your company, second, you must develop solutions based on a deep understanding of supplier economics and business dynamics and third you should utilize differentiated buying tactics to optimize the economic relationship. Eight Step Strategic Sourcing Process. In order to execute an effective strategic sourcing plan the following process was followed: 1. Perform Procurement Analysis and Develop Profile of Sourcing Group 2. Develop Strategy for Sourcing Group 3. Generate Portfolio of Suppliers 4. Develop Solicitation and Visit Suppliers 5. Evaluate Suppliers Proposals 6. Select Competitive Suppliers 7. Negotiate with Suppliers 8. Manage Transition Plan Perform Procurement Analysis and Develop Profile of Sourcing Group. The first step is to determine the sourceable spend and develop specific segmented categories. Typical profiles begin at a commodity level (i.e. Machined Parts, Fasteners, Raw Material, etc.) but regular assessments of priorities, opportunities and resources at an enterprise level should be conducted across commodities to align resources are ensure a return on investment. Based on limited resources, which commodity should be developed first? One technique is to plot the relative annual expenditure for each commodity group along two axis, the x-axis represents the ease of implementation and the y-axis reflects the potential savings. Select one or two commodities that will provide the best return and set the stage for future strategic sourcing Sourcing Group Position Matrix. Using a 2X2 Position Matrix (see chart 1 on the next page) for each of the selected commodities will provide broad guidance on strategy selection. The four quadrants are Shop (lower left), Leverage (upper left), Manage Risk (lower right) and

Partner (upper right). The x-axis reflects the difficulty of supply and the y-axis is the relative impact that the commodity has on your business. The higher the impact and difficulty of supply (i.e. lack/cost of substitutes) the greater the need to develop a partner strategy.

2 Partner (upper right). The x-axis reflects the difficulty of supply and the y-axis is the relative impact that the commodity has on your business. The higher the impact and difficulty of supply (i.e. lack/cost of substitutes) the greater the need to develop a partner strategy. Conversely the ease of supply and the minor impact that a commodity has on your business aligns this commodity into the shop quadrant. Chart 1. Commodity Segmentation. Next a detailed segmentation of individual commodities must be conducted. This spend/part number breakdown can center on complexity (simple to difficult), material type (i.e. steel, stainless steel, aluminum, etc.) or processing characteristics, for example. Detail segmentation of the commodity and alignment with the manufacturing strategy is crucial to developing a comprehensive strategy. Develop Strategy for Sourcing Group. The second step utilizes the commodity segmentation, data analysis, discussions and interviews with the stakeholders to develop

3 sourcing options. Table 1 describes some options, external dependencies (outside Supply Chain Management), basic supply base requirements, process steps required to assemble and execute the sourcing strategy and internal information necessary to compile a comprehensive strategy. Table 1. Options Dependencies Leverage Spend Optimize current spend through volume & part families None Increase Value-Added Work Content Provide opportunities through kitting, subassembly & valueadded work Factory Buy Large Assemblies Create New Sourcing Group: Airframe Assemblies Enterprise Requirements Process Steps Lean, Flexible, Trustable Suppliers Segment Spend Select Sources Compete Package Implement Developing Integrators & Value-added Suppliers Identify Value-Added Opportunities Select Source Develop Project Plan Implement Experienced Airframe Integrators Target Structure Select Source Develop Project Plan Implement Information Spend Profile, Value Stream, Market Analysis Current Projects Underway, Plan Product Mix, Volume Enterprise Strategy and Timing Generate Supplier Portfolio. The third step requires that each supplier should be evaluated across a standard set of dimensions such as; manufacturing excellence, delivery, quality, cost leadership, financial strength, strategic compatibility and technology (see Chart 2 on the next page). Both qualitative and quantitative input is required to obtain a valid supplier portfolio. Weighting each category can put more emphasis on a long-term focus. Financial strength, strategic compatibility and superior technology are better indicators of future performance than the current delivery and quality performance. Those suppliers that meet the requirements should be invited to participate in the Request for Quotation (RFQ). Develop Solicitation and Visit Suppliers. In the fourth step in the Strategic Sourcing process close and early coordination with the selected suppliers is required to develop an effective implementation path. Publishing key milestones such as RFQ and Request for Information (RFI) release and due dates, bidder conference, on-line auction date and award date. Conversion of drawings and operation sheets to scanned files, publishing RFI and RFQ s and scheduling bidders conference require tight coordination and adherence to schedule. Quality control is also very important in this step to ensure clear requirements are communicated right the first time. The use of a bidder conference and using frequently asked questions (FAQ) in the RFQ were invaluable in communicating to our suppliers

Chart 2. Evaluate Supplier Proposals. During the fifth step each supplier should be required to complete a Request for Information (RFI) package as a component of a complex bid evaluation and award.

4 Chart 2. Evaluate Supplier Proposals. During the fifth step each supplier should be required to complete a Request for Information (RFI) package as a component of a complex bid evaluation and award. The following topic areas are examples that should be considered in a RFI package: comments and feedback on bid package, business impact assessment, cost reduction methodology, and financial statement and key financial ratios. This input will allow you to assess several factors not typically (or formally) considered in a sourcing decision: dedication, desire, creativity and financial strength. Results should be compiled and evaluated in a standard template (see chart 3 on the next page). Select Competitive Suppliers. The sixth step assesses the suppliers across a number of dimensions to ensure compatibility, performance potential and financial viability, of which the last piece of information is price. When evaluating multiple year pricing a net present value basis analysis can eliminate pricing variation over time. Although this provided a level playing field and a total cost basis for each bid package the overall advantage should be weighed against the additional complexity of converting back to a unit price discussion during negotiations, training of the suppliers and final conversion prior to execute the purchase order. Negotiate with Suppliers. Successful negotiations, the seventh step, require more time in preparation than in actual negotiations. Selection of the right negotiating team, establishing a common vision, identifying and evaluating options will provide the framework to a successful negotiation. It is always beneficial to role-play and practice the major messages that the team must deliver prior to negotiations. Using a negotiation worksheet can also assist in creating key messages for negotiations. Some questions you should answer are; What are the supplier s needs as a company? What are the personal needs of the supplier s negotiation team? What is our leverage as a buyer? The team should spend a considerable amount of

5 time developing various options. There should be a minimum of three basic positions: the best position that the negotiation team feels the company can achieve, the worse position that the company would accept and an alternative if an agreement cannot be reached. Chart 3. Manage Transition Plan. The final and eighth step prior to award is the operational implementation plan. Identification of issues and risks are the central concern of this process step. Utilizing two part-tracking tools, based on part complexity, to monitor the implementation and establish a clear and direct communication link with the awarded supplier. An example of tracking for less complex items tracked the supplier throughout the manufacturing and planning process by discrete completion date for all part numbers. It is essential to develop an initial inventory overlap plan and the buyer/commodity manager is assigned to monitor the execution to plan. Involvement of the tactical team is crucial to sustaining and adjusting the plan as required. Complex part numbers requires a project milestones along with individual line-of-balance charts measured against the Master Production Schedule. Weekly meeting are held by Senior Management to review project progress using a standard format (see chart 4 on the next page).

6 Chart 4. Value Engineering (VE). Is defined by the Society of American Value Engineers as an organized effort directed at analyzing the functions of goods and services to achieve those necessary functions and essential characteristics in the most profitable manner. Value Engineering is an excellent alternative or adjunct to the sourcing strategies previously discussed. In those commodities typically located in the partner quadrant on the 2x2 Positioning Matrix value engineering is essential to help reduce costs. To effectively execute successful VE initiatives experienced Engineers must be aligned with the procurement team and continue to be affiliated with functional Engineering. Results can far exceed those achieved from other strategic sourcing efforts but may be significantly more costly. Use of a total cost model is recommended to ensure profitability. Conclusion. There are three principle components that successfully drove Sikorsky to go beyond a commodity centric view and develop a comprehensive value chain model. There is a compelling business requirement, there leadership, UTC s CEO George David stated at the Executive Conference May 11, 1999, set revolutionary rather than evolutionary goals, and more decisively to adopt the change agenda and the use of a disciplined approach that truly understands supplier economics and business dynamics.

ADR International ADR s Online Supply Chain Academy (OSCA) elearning Courses

Learning ADR International ADR s Online Supply Chain Academy (OSCA) elearning Courses 2016 ADR International Contents About ADR s Online Supply Chain Academy (OSCA) 3 The Strategic Sourcing Process 4 ADR