Supplier Base Rationalization Kimball Bullington, Ph.D. Thank you. Purchasing in the year 2000: Only 1.5 years away.

Supply Base Consolidation What is supply base consolidation? Why consolidate? How can I be successful?

What is supply base consolidation? Consolidation: A reduction in the number of suppliers.

Why Consolidate? Cost Reduction Cost of Procurement Price Decreases through Consolidated Purchases and Increased Negotiating Power

Why Consolidate? Supplier Development Cost reductions Lead time reductions Quality improvements 53.2 % of the cost of sales is in materials. If you are going to save big money, you have to attack it. Dobler, Donald M. and Burt, David N., Purchasing and Supply Management, 1996, McGraw-Hill. “The early [productivity] hits come from sheer leveraging and supplier consolidation,” says Barber. “But as you mature through, you have to evolve into driving true productivity in the process by implementing projects within the supply base.” AlliedSignal, Minahan[1997]

Why Consolidate? Supplier Development Supplier design support Time to market Inventory reductions 53.2 % of the cost of sales is in materials. If you are going to save big money, you have to attack it. Dobler, Donald M. and Burt, David N., Purchasing and Supply Management, 1996, McGraw-Hill. “The early [productivity] hits come from sheer leveraging and supplier consolidation,” says Barber. “But as you mature through, you have to evolve into driving true productivity in the process by implementing projects within the supply base.” AlliedSignal, Minahan[1997]

How Can I Be Successful? First Steps Evaluation of Current Supply Base Determine the Type of Supply Base Needed Plan the Project

How Can I Be Successful? Evaluation of Current Supply Base Number of Suppliers Breakdown by Commodity Skills / Process Evaluation Performance Evaluation

The Ideal Supply Base

The Ideal Supply Base Powerful improvement engine Fast Flexible Innovative Good communicators

Supply Base Fitness NUMMI: 3 Product Lines - 84 to 140 direct suppliers Increasing domestic content Long-term relationships

Supply Base Surgery Al AlliedSignal: 10,000 to 2,000 liedSignal Supports 6 Program Separate productivity improvement initiative liedSignal

Supply Base Renewal - Tiering BASF - 10,000 suppliers to 14 Lowered internal costs Leveraged position with suppliers Bypassed IT problems VMI Walters, Paul, “BASF Takes Initiative in Supplier Coordination,” BIC Newspaper, September, 1997.

Supplier Characterization Matrix High Critical 2: Special Situations Low spend - high risk Critical 1: Long-term Relationship High spend - high risk Risk Non-Critical 2: Transactional Low spend - low risk Non-Critical 1: Contractual High spend - low risk Low High Annual Spend

Supplier Characterization Matrix High Critical 2: Special Situations Critical 1: Long-term Relationship Risk Non-Critical 2: Transactional Non-Critical 1: Contractual Consolidate Low High Annual Spend

Supplier Characterization Matrix High Critical 2: Special Situations Critical 1: Long-term Relationship Consolidate Risk Non-Critical 2: Transactional Non-Critical 1: Contractual Consolidate Low High Annual Spend

Supplier Characterization Matrix High Critical 2: Special Situations Critical 1: Long-term Relationship Consolidate Risk reduce & Consolidate Risk Non-Critical 2: Transactional Non-Critical 1: Contractual Consolidate Low High Annual Spend

Barriers to Consolidation Fear of loss of competition Doubtful savings Dilbert Lack of commitment to the selection process

How Can I Be Successful? Keys to a Successful Plan Plan with your customers in mind (QFD) Transaction costs Leverage Supplier development Design support

How Can I Be Successful? Keys to a Successful Plan Sell consolidation Top management Customers Participants Suppliers

How Can I Be Successful? Keys to a Successful Plan Develop a supplier evaluation / selection process & implement it defendable (key customer input) flexible

Structured Supplier Evaluation

How Can I Be Successful? Keys to a Successful Plan Implement meaningful measures Focus your efforts (commodities) Staff for development Publish successes

How Can I Be Successfully Consolidated? Keys to a Successful Plan Tier 1: Integrate Tier 2: Make services, savings quantifiable

Supply Base Consolidation: Summary Consolidation can yield savings in: transaction costs leverage inventory reduction supplier development It is a key enabling strategy to other supply improvements.

Supply Base Consolidation: Summary Keys to success: planning with customers in mind selling the plan selection / evaluation focusing improvement staffing for success measurement publishing results

Supplier Base Rationalization Kimball Bullington, Ph.D. Thank you. Purchasing in the year 2000: Only 1.5 years away.