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Strategic Sourcing

Whether you are tight for cash or just sense the opportunity to negotiate lower prices in this market, now is a great time to revisit your procurement contracts. PIP is busy across the globe assisting its clients to renegotiate their categories.

While most procurement departments see opportunities to reduce their spending, the hard part is achieving maximum savings in a short time frame and then sustaining these savings in the longer term. PIP helps you to achieve higher savings more quickly due to:

• robust methodology
• focus on prioritisation and 'time to cash'
• our extensive operational experience which means we understand the economics of the categories you are buying
• our ability to hard wire benefits to ensure that savings are locked in over the longer term
• top in class resources who knuckle down to supplement your own people

A) Determine the order to tackle categories

PIP can help you gain a better understanding of your sourcing needs and prioritise them by taking the following steps:

1. Establish a basic fact database (identifying "who buys what, from whom, at what price")
2. Assess the state of wiring in the strategic sourcing and supply chain functions (using our online wiring diagnostic)
3. Use a value:ease matrix to pick priorities

1. Establish a basic fact database

This can be done relatively quickly if the organisation's information is in good shape.

If the organisation's information is more difficult to aggregate quickly, we have software and specialists who can rapidly find and gather the relevant data from accounts payable and other sources and rapidly create a Sourcing Cube for you – determining who buys what from whom for how much.

Understand "who buys what from whom at what price?"

2. Assess the state of wiring in strategic sourcing and supply chain functions

The state of procurement wiring (systems, processes, accountabilities, skills, reports and reviews) is also assessed through online surveys with you and your people, followed by more in-depth interviews examining issues brought to light through the surveys.

3. Use a value:ease matrix to pick priorities

The financial and wiring assessments above are then combined to determine the savings potential and ease of savings delivery by category. This is typically done through high level sessions with your people to ensure the subtleties around each spend category are incorporated in the assessment.

Value:ease matrix

B) Capture savings for a chosen category

When we then tackle a category, we follow a three stage process to capture and lock in savings. These three stages are discussed in turn below.

Our methodologies have been covered extensively in our newsletter. Please contact info@pipint.com for further details.

1. Develop Strategy

In the first stage, we develop hypotheses of where the savings are likely to come from given our combined knowledge of the category in question. Then we assess the supply market (how many players, what their unutilised capacities are and marginal costs) and internal and total market demand. We work out the total value of ownership tree to understand the total economics of this spend for the business. . With appropriate information, we assist you to develop a spend strategy to lead the team going forward on what opportunities to pursue and how.

Overview: Determining opportunity hypothesis

2. Drive Value

After having developed the initial strategy or approach for each high priority category, we help you drive the value out through 3 sub-elements:

• i) Optimise usage:
  Our deep operations experience enables us to coach your people to systematically identify the drivers of usage in your business and work with the users to identify ideas for how to reduce usage in that category. This not only enables you to capture significant usage reductions as well as those on price, but leads to a much greater understanding of the category about to be procured prior to going to market.
  
  For example, at a recycled fibre pulp mill, we tackled the chemical spend by systematically identifying the root causes of chemical use and cost. Ideas were generated and implemented, reducing usage by 25% and price by a further 8% reducing total spend by 33%.
  
  
• ii) Pursue supplier development:
  Each supply chain network is unique. As we have assisted many of our clients in the past, we help you explore joint supply chain opportunities with potential vendors and develop optimised fit-for-purpose supply chain solutions with them. Furthermore, we also help you develop ongoing improvement initiatives with your vendors to maintain lasting positive relationships that constantly bring value to your business.
  
  
• iii) Prepare and run negotiations:
  Unlike other consulting firms that only tell you which suppliers to pursue, we assist you every step of the way, from negotiation preparation right through to signing new contracts. We use various tools and techniques such as contract optimiser to ensure that you are getting the most value out of every negotiation as well as training your people in negotiation techniques.

3. Capture the value

Negotiating a good price is irrelevant if the value cannot be captured and sustained. We help you hard wire the value into your organisation in two ways. First, we help you implement new contracts in the most efficient manner possible using our rigorous implementation methodologies. Second, we help you hard wire in contract value by training your contract owners how to manage vendors, by setting up vendor reviews with the right KPIs, sections and structure to make performance management easy.

Summary

Buying well requires a tightly controlled process that maximises the total value of ownership to the organisation. It involves rigorous analysis, excellent strategic thinking and operational understanding, effective risk management, well-rehearsed and best practice negotiation skills, a contract that covers all critical contingencies and insistence on the right contract management 'wiring' to cover the contract duration. PIP has extensive experience in helping clients identify and strengthen weak points in their process. The following case studies pull the theory above together by giving examples of how PIP has assisted clients with strategic sourcing.

Case Study 1: Electrolytic Metal Smelter

At an electrolytic metal smelter, cathode supply was critical to the daily operations. The site had only one cathode supplier who was local and totally dependent on supplying our client. When positioned on the matrices the client was 'core' to the supplier, while the criticality of cathode supply positioned the relationship as 'strategic critical' for our client. To tip the negotiating power our way, the key was to develop in-sourcing as a credible alternative and reduce the risk.

To tackle this we:

• Developed a detailed model of supplier's profit margin
• - Visited the client site to understand process flow
• - Collected data from numerous sources: awards, market cost of materials, number FTEs
  
  
• Determined economics of in-sourcing, then used in-sourcing economics versus reverse-engineered margins of the supplier as the basis for financial discussion

Achieved 20% reduction in price

Case Study 2. Mobile Equipment

Context

This global miner was spending USD 1.5 Billion per annum on mobile mining equipment (haul trucks, loaders, graders, dozers and scrapers) including capital, spares and service costs. The challenge was to deliver savings from a category which had been sourced multiple times and where a major global supplier was firmly entrenched as the supplier of choice at the majority of the global miner's sites.

Approach:

• Aggregated spend across sites to increase incentive to suppliers
• Created appropriate segmentation model defining procurement in terms of product class, weight class, geography, and supply base
• Defined comprehensive Total Value of Ownership Model enabling detailed scenario testing of new technology capability (e.g. electric versus mechanical drive), site profile, (e.g. heavily graded through to non graded site) and unbundled procurement (e.g. mix and match chassis, body, drive train)
• Implementation of new measurement metric, Net Present Cost per Tonne
• Evaluated all operating hypothesis e.g. Lease vs. Buy, Electrical vs. Mechanical, product rationalization
• Implemented multiple rounds of competitive negotiations at CEO level
• Created global Heavy Mobile Equipment Directorate to conduct strategic sourcing and ongoing implementation

Result

• Delivered savings of USD$150 million
• Created globally agreed standard management methodology for maintenance
• Implemented standard measurement and performance management methodology
• Implemented extensive use of improved demand management capability e.g. site to site change-out best practice methodology, improved forward planning and clarification of standard usage patterns

Case Study 3. Acid purchase at manufacturer

Our manufacturing client had high acid use. Historically their supply options were very limited putting them in a weak position in negotiations with their incumbent supplier. PIP worked with the client to identify and build credible alternatives to the current supplier.

Specifically, PIP:

• Gathered facts on current spend by site, user needs and wants, contract prices, supplier performance, and industry trends
• Used a request for information (RFI) to determine possible volumes and pricing from alternatives and the combinations that would meet requirements at the lowest cost
• Reverse engineered transport costs to determine probable transport costs from the various suppliers (with and without backloads)
• Determined equivalent acid price based on capital costs required to setup regeneration or recycling plant (breakeven)
• Reverse engineered various suppliers' economics to determine probable margin
• Determined client's Total Value of Ownership associated with acid
• Determined appropriate negotiation strategy based on best alternatives
• In combination with price negotiation, introduced usage reduction initiatives

Result

15% saving from re-negotiation of contract and avoidance of highly probable price increase while PIP on site, 22% of additional savings identified and in the ideas pipeline.

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