WELCOME BEM-VINDO. Copyright 2013 ISCS

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1 WELCOME BEM-VINDO

2 Palestra Internacional: Total Cost Management Frank Wilhelm President of International Supply Chain Solutions, Inc MAIO 2013 CENESP - SP inbrasc.org.br/maratona

3 TOPIC To understand the power and potential of statistics and the role that it plays within the purchasing organization of today and the future. Explore several specific statistically based processes.

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5 EVOLUTION OF THE PURCHASING FUNCTION Administrative Transactional Tactical Knowledge Based Integrated Strategic Global Leverage Collaborative Statistically Based, Technology Driven Process Paperwork Administrivia Low Level Reporting Data poor Overhead burden Process Transactions Low Level Reporting Data poor Overhead burden Bottom line neutral React to requisitions Purchase price only Fixated on negotiations Place orders Expediting TCO Demand aggregation Systems Commodity focused Professional Sourcing Cross functional Team approach Bottom line impact Higher reporting Supply chain enabler New product introduction Shared strategic partner End of life Supply base management Relationship management Global reach Knowledge expansion Risk management Network alliances Systems sophistication Suppliers as partners Internal integration Strategic driver Replenishment Collaborative processes Perfect quality 0 variation SPC Data mining tools Strategic owner Valued enterprise function Statistically driven Technology savvy

6 Process Sourcing Supplier Selection Sourcing & Commodity Strategy Agreement Development Length of Contract Cost Benchmarking Cost Performance Tracking Supplier Management Relationship Management Supplier Classification Supplier Performance Business Planning Organization Capability Information Mgmt. STAGES OF PROCUREMENT EXCELLENCE Traditional Emerging Leading World Class Reliance on past experience Multiple sourcing Order related Multiple RFQ s Minimize unit price Based on initial purchase No specific relationships Interchangeable suppliers Some evaluations Communication by exception Reaction to internal stimuli Functional silos Transaction accounting = A general practice or characteristic exhibited = A general practice or characteristic exhibited to a lesser degree = A general practice or characteristic not exhibited Reputation based Multiple and dual sourcing Yearly contract negotiations Minimum total acquisition price Savings projections Preferred suppliers Limited relationship structure Subjective ratings Reaction to external stimuli Building purchasing database Supplier partnerships Single source by standard commodities Multi-year contracts Total cost criteria Jointly managed performance criteria Suppler certification Single blue-print for relationships Some performance metrics & evaluations Strategic and long term procurement planning Central Management, local administration of purchasing Paperless info exchange Strategic Sourcing Strategic Alliances; Co-located suppliers Life cycle agreements Continual cost benchmarking Performance measures linked to business cycles, transaction timeliness and total cost management Key Supplier Account Management Systematic ratings Proactively change Functional and process orientation Enhanced info sharing throughout value chain

7 POTENTIAL USE OF STATISTICS WITHIN THE PURCHASING FUNCTION Supply Base Management Strategic Sourcing Quality Control Supplier Ranking Commodity Pricing Economic Trends Performance Reporting Currency Fluctuations Value Analysis Global Price Trending Cost Profiling Vendor Management Market Analysis

8 POTENTIAL USE OF STATISTICS WITHIN THE PURCHASING FUNCTION Supply Base Management Strategic Sourcing Quality Control Supplier Ranking Commodity Pricing Economic Trends Currency Fluctuations Value Analysis Global PRICE Trending Cost Profiling Performance Reporting Vendor Management Market Analysis

9 IMPACT OF STATISTICS ON BUSINESS GENERALLY Mid 80 s Track Trends & Probabilities Technology & Process improvement techniques such as six sigma Control Behavior & Processes

10 IMPACT OF STATISTICS ON PURCHASING COMMUNITY Prior to 1985 Too many suppliers totally Too many component parts Too many suppliers for each component High degree of variability in every respect Difficult to measure performance Difficult to communicate quality requirements Could not understand suppliers processes No basis for collaboration No Common language with supply base Supplier performance reporting and ranking was difficult Too much subjectivity

11 1985 A new process called six sigma was created at Motorola. This breakthrough Statistical process methodology was created by Bill Smith and the impact was profound and adopted by companies throughout the globe. The concept was applied not only to quality management but to virtually every business process within the enterprise. Variability can now effectively be eliminated.

12 Post 1985 IMPACT OF STATISTICS ON PURCHASING COMMUNITY In Purchasing, the introduction of this concept Created a common language Provided a universal measurement system Facilitated the internal integration of the purchasing function Allowed for sophisticated supplier partnerships and programs to occur Eliminated incoming inspection Greatly enabled cost reduction Allowed for remote viewing of the suppliers process Established a scientific method of measuring and controlling supplier performance Elevated the status of the purchasing function Created an environment for establishing advanced replenishment techniques Create quantifiable score cards to ensure sustainability

13 PROCUREMENT HAS ACCESS TO AN ARRAY OF STATISTICALLY BASED OPTIONS TECHNIQUES Scatter plots Histograms Pareto charts Control charts Run charts Correlation coefficients Factor analysis Regression analysis PROCESSES Score card Six sigma DMAIC (Define, Measure, Analyze, Improve, Control) DPMO ( Defects Per Million Opportunities) Process control Performance measurement Supplier ranking

14 SUPPLIER SCORE CARD IMPORTANT SUPPLIER CONTROL MECHANISM SELF MOTIVATES THE SUPPLIER INVOLVES MOST OF THE PRIMARY FUNCTIONS OF YOUR ENTERPRISE SPRINGBOARD FOR INNOVATION AND CONTROL FOSTERS PRO-ACTIVE SUPPLIER COMMUNICATION

15 SELECTING SUPPLIER SCORECARD CATEGORIES Supplier Scorecard Quality Delivery Cost Responsiveness Innovation Scorecard category Quality Delivery Cost Responsiveness Innovation Metrics PPM Performance RMA cost & frequency Lot Failure Problem resolution rate Replacement responsiveness % on time delivery % late delivery % early delivery Actual v. quoted lead time % total cost reduction year over year Actual cost reduction year over year Response to expedited orders Response to emergency parts change Reaction to schedule change RFQ response time Tech & process responsiveness Best practice sharing ENTERPRISE WIDE ACTIVITY Sustainability Sustainability Risk Financial soundness Ownership status Strategic partnership

16 ACTUAL SUPPLIER SCORE CARD FREQUENCY QUARTERLY Supplier: Technology INC. Category: Electronic Components Contact Person: Bob Swanson Rated By: BH, TF,JW Rating: 1. Excellent 2. Good 3. Average 4. Unsatisfactory 5. Unacceptable MEDIA PAPER MONTHLY WEEKLY REAL TIME RANK CATEGORY GRADE WEIGHT % TOTAL A A A B B Product quality On-time-delivery Cost Responsiveness Innovation TOTAL GRADE 3.9 SUPPLIER PORTAL

17 SUPPLIER RANKING SELF MOTIVATES THE SUPPLIER CAUSES PROACTIVE COMMUNICATION WITH PRIMARY SUPPLIERS BASIS FOR STRATEGIC PARTNERING

18 SUPPLIER RANKING WORKSHEET

19 SUPPLIER RANKING REPORT RANK SUPPLIER SCORE 1 ACME TECHNOLOGY ZENITH CONTROLS 76.3

20 GENERAL STEPS IN IMPLEMENTING AN SPC PROCESS 1. Train your people 2. Pareto the opportunities 3. Key control points 4. Understand the key measurement 5. Control charts 6. Data transmittal and archiving 7. Corrective action 8. Communication protocols

21 SPC SUCCESS STORIES Through statistically based supplier evaluation Boeing achieves annual purchase price reductions of 3-6% Through the implementation of a comprehensive 6 sigma project Humana: Achieved an 800% increase in procurement savings over a six year period Reduced the number of suppliers by 50% over a six year period The Oncology Care division embarked on a statistically based scorecard program along with a six sigma vendor oversight program that: Achieved an 80 % improvement in supplier performance Resulted in a 6.7% decrease in Purchase price Created a 100% elevation in incoming quality

22 SPC SUCCESS STORIES A statistically driven supplier selection and scorecard process for the City of Seattle saved an initial $11mm and continues to generate and additional $2 million per year. Other benefits include consolidation of vendor contracts, leveraging larger discounts; transactional simplification, decreases in cycle time, clarification of relationships between buyers, end-users and vendors resulting in process efficiencies and improved contract administration. Banner implement a six sigma based global commodity management process. As a result, we now have a fully functional commodity management process that is ingrained into our culture and standard operating procedures. Savings of seven figures dropped to the bottom line almost immediately. Inspection costs have disappeared, quality has improved dramatically and the purchasing function is now viewed as a strategically important asset.

23 SPC PITFALLS Not a transportable process (the China experience) People dependence Vigilance is required Results can be misinterpreted Bias can be built in Flawed methodology Measures only the result, not the cause

24 THE NEED AND CAPABILITY VARIES GREATLY AMONG BUSINESS SECTORS High Tech Aerospace Pharmaceuticals Telecommunications Complex Manufacturing Automotive Process industries Energy Oil and Gas Extraction industries Service industries ( SECTORS)

25 As purchasing organizations reach around the globe, it is wise to remember that infrastructure and capability varies greatly from region to region, limiting potential

26 TOTAL COST OF OWNERSHIP COST BENEFIT

27 TOTAL COST OF OWNWERSHIP IS: Estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle. DO: Consult and involve Stakeholders internal and external Involve technologists and other specialists Be thorough DON T: Drive cost to the point of sacrificing value or benefit COST BENEFIT

28 THE TCO ANALYSIS IS MEANT TO: Bring out so-called "hidden" costs of ownership and display Put the spotlight on potential cost problems before they become problems Reveal key dependencies Serve as a good basis for supplier cost collaboration Facilitate technical innovation Establish cost accountability Reveal the true total cost

29 EXAMPLES OF COST CATEGORIES COMPONENT Purchase price Transportation inbound Planning Effort Packaging Inspection Transaction costs Interplant movement Storage Cost of money Materials organization overhead Obsolescence Taxes COMPUTER HARDWARE AND SOFTWARE Server hardware and software Workstation hardware and software Installation and integration of hardware and software Purchasing research Warranties and licenses License tracking - compliance Migration expenses Risks: susceptibility to vulnerabilities, availability of upgrades, patches and future licensing policies, Purchase Price

30 THE PROCESS BEGINS WITH AN ANALYSIS / MATRIX WHICH SHOULD: Identify Every Detailed Cost Component Identify Internal / External Ownership Assign Risk Potential Consider Life Cycle Identify Indirect Costs Perform Pareto Ranking Assign Targets AND THEN: Establish highly focused cost optimization team to work within existing management structure Plan & execute advanced cost optimization practices Ensure implementation & Sustainability

31 THE PROCESS BEGINS WITH AN ANALYSIS / MATRIX Example Part:.01 MFD capacitor Part # Used on: synchronous transponder Current cost: $67 Target cost: $52 Vendor: United Electronic Buyer: Charles Ventura Cost Element Ranking (Pareto) % of Total Internal External Target Risk Owner Comments Design A 15% X 12% High J.D. Need MGT. approval Inbound Freight B 7% X 5% High P.L Packaging B 5% X 3% Med. L.B Storage B 3% X 1.5% Low D.M Operations cooperation Purchase Price A 63% X 58% High C.V. Inspection A 7% X 3% High R.F. Quality organization

32 WHY TOTAL COST EFFORTS TYPICALLY FAIL 1. Lack of budget ownership and management 2. Lack of technical category expertise 3. Supply Chain function disconnect to business operations 4. No influence over the application 5. Inadequate sourcing process 6. Poor supplier management

33 WHAT LEADING COMPANIES DO TO CONTROL TOTAL COST 1. Advanced strategic sourcing 2. Advanced supplier relationship management 3. Advanced contracting processes 4. Advanced category management practices 5. Re-specification 6. Service level optimization 7. Commodity indexing 8. Value engineering 9. Supplier exploitation

34 PITFALLS OF TCO Not supported by traditional accounting methods Not within normal reporting structure, achievements may not be noticed Cost take out in the design or pre-procurement phase will go unheralded and must be paraded Accountability for some cost activity may be obscure.

35 PALESTRANTE Frank Wilhelm President of International Supply Chain Solutions, Inc.