1. Chapter 10 Category sourcing: Getting better performance from suppliers

2. Program Reasons underlying cost savings potential in purchasing
How to identify cost savings potential
Developing a sourcing strategy
Category sourcing planning
Getting better results from suppliers
The myth of partnership
Conclusions

3. Cost saving potential in purchasing (1)
Companywide programs focused on cost reduction seem to be successful.
Reasons for slack in materials cost and prices:
Traditional purchasing (Buyers are involved late, if at all, in the purchasing decision-making process; the company deals with a fixed group of familiar suppliers)
Continuous competitive bidding amongst a fixed group of suppliers Purchasers regularly sound out competition amongst a limited number of suppliers by playing them off against each other

4. Cost saving potential in purchasing (2)
Price increases automatically passed on to the next in line
Over -specification Technical requirements (defined by R&D departments) which are not necessary for the functioning of the product are imposed on suppliers.
Supplier cartels in (international) supply markets
In spite of the agreements made on EC level, cartels in most European economies are very common. In many industries, there are only a limited number of players, which enables silent agreements
Suppliers’ customers relationship programs
Relationship programs include offering fringe benefits to customers in order to create a preferred position at members of Decision Making Unit.

5. Identify cost savings potential
Starts with analysis of the company’s purchasing spend by means of a spend cube
Category tree based on direct and indirect spend categories
Spend categories:
A group of coherent products or services, bought from the supply market that are used in our company to satisfy internal or external customer demands

6. Example a category tree for non-production related purchasing spend

7. Identify cost savings potential
Cost savings can depend on:
Customize versus standard specifications
Modular versus component buying
Buyer-supplier dependence
Number of suppliers involved in last tender
Scope of last tender
Type and age of contract
Market price versus cost price differential
Level of purchasing involvement

8. Developing a sourcing strategy
Supplier relationship
Sourcing strategy issues
Global versus local sourcing: International supplier orientation necessary or is local, national orientation sufficient?
Single versus multiple sourcing: Purchase the product at one or more suppliers?
Partnership or competitive bidding? Buy from supplier with whom a partnership relation is preferred or keep the supplier at distance?

9. Developing a sourcing strategy
Supplier relationship
Contract strategy issues
Buying on contract or buying on spot basis. Is the total volume of purchased products to be covered by a contract or is part of the volume bought on a spot basis?
Price agreement versus performance agreement. Just a price agreement or is a detailed service level agreement (SLA) necessary with arrangements on time, tests, maintenance etc?

10. Category sourcing planning
The category sourcing planning provides a strategy for every important purchasing category
Content:
Business strategy and business issues
Analysis of historical data
Customer requirements and purchasing process
Objectives sourcing strategy
Commodity sourcing strategy
Planning of activities
Organization and team composition

11. Getting better results from suppliers
Towards performance based relationships. A stepwise approach:
Set up the best legal contract, A thorough analysis of current contract arrangements with existing suppliers. Objective: agree on a performance based contract.
Select the best supplier, analysis of (international) supply market, sounding out international competition. Objective: Select Best-In-Class supplier.
Get the best solution from the best supplier, focus is on continuous improvement with the supplier based upon Total Cost of Ownership.

12. The myth of partnership
Philips, one of the first European companies focusing on partnership, introduced the term ‘co-makership’.
Objective of this type co-operation is to achieve improvements in:
Cost
Logistics
Quality
Product development

13. The myth of partnership
Ellram and Hendrick (1993):
A ‘partner’ is defined as a firm with whom your company has an ongoing buyer-seller relationship, involving a commitment over an extended time-period, a mutual sharing of information and a sharing of risks and rewards resulting from the relationship
This research has demonstrated that:
Less than 1% of supplier relations can be characterized as a partnership relationship. However, these suppliers were responsible for 12 % of total purchasing volume!

14. The myth of partnership
A DTI (1994) study concludes that ‘in developing new working agreements with their suppliers most vehicle manufacturers still appear to deal more in rhetoric than in reality’
This comes a no surprise. Cooperation with suppliers requires internal teamwork between all disciplines and companies still operate in a functional manner.
Developing a partnership with suppliers takes time. The road is long and difficult. There are no easy ways or short cuts to success here.

15. The myth of partnership
Aspects
Supplier
Preferred supplier
Supply partner
Design Partner
Relationship characteristics
operational
tactical
strategic
Time – horizon
from order to order
1 year
1-3 years
1-5 years
Quality
as requested by
producer
quality control by
and supplier
‘sign-off’ by supplier
quality assessment by
supplier
sign-off by supplier
early supplier
involvement in design
Logistics
orders
annual agreements + call- off orders
periodical scheduling of materials requirement by producer
electronic document
interchange
Contract
annual agreement
(1 year)
(>1 year)
quality agreement
design contract
life of type responsibility
Price/cost
price
price+ rebate
price + cost-reduction
targets
price based on open
calculation
continuous improvement

16. The myth of partnership
“Partnership is the result of the contractors’ continuous effort to improve results in the relationship with suppliers, rather than a technique which can be adapted and applied in a short time”

17. Conclusions
Effective supplier management is another cornerstone for a successful business strategy.
The international competitive arena forces manufacturers to look continuously for ways to improve their value propositions to customers.
The foundation of any category sourcing plan is a sound spend analysis. The purchasing spend is categorized in homogeneous product categories though a category tree.
The road to partnership is long and difficult. There are no easy ways or short cuts to success.