1. Trade Management
Sourcing & Optimising Strategies
Module 8

2. Trade Management Highlights
Buyer / Chief Purchasing Officer – Challenge
Supplier Base Optimization
Strategic Sourcing Process
Supplier – Financial Analysis
Risk Management
Supplier Evaluation (Performance Audits)

3. Trade Management Purchasing Issues: Re-focus on process capabilities
Organisations are / need changing
Supply Market and Sourcing Strategies are changing
Warehousing & Transportation are getting sophisticated
Increased use of technology and suppliers’ capabilities - to obtain visibility of the supply chain

4. Trade Management Purchase Manager’s Issues Who are your key suppliers?
What is your organisation total spend each year?
What is the spend by category / supplier? (Eg. raw materials, IT)
What is the total acquisition cost (TAC) & the life cycle cost of capital purchases?
What is the value your suppliers provide towards your organisation’s success and reputation?
How to manage vendor performance?
What are the purchasing risks and how to manage it?
What are you Out / In-sourcing?
Whether your purchasing strategies are aligned with business strategies?
What percentage of your external spend is managed by purchasing?
Do you assess the outcome of your negotiations?
How do you develop your key suppliers?
What financial metrics to focus on?

5. Trade Management Purchasing Optimisation: 80/20 Rule
Analysis to identify, 20% of suppliers receiving the majority of purchase dollars
Identify the minority of suppliers causing the majority of problems
80/20 rule assumes the best suppliers receive the majority of purchase dollars

6. Trade Management Purchasing Optimisation (cont)
With too large a supply base, the challenges
Supplier integration
Collaborative agreements
Supplier development
Joint total quality/cost reduction efforts
To determine the right mix of capable suppliers
Optimisation does not only mean adding or reducing suppliers. It can mean switching suppliers, also !!
Optimisation does not mean supply base reduction
As companies continue to rely on fewer total suppliers, the selection process takes on even greater importance

7. Trade Management Purchasing Optimisation Benefits:
Reduced supply base risk
Lower transactions costs
Leverage leading to lower purchase costs
Ability to pursue value-added activities
Opportunity to work with world-class suppliers, which leads to improved value chain performance

8. Trade Management Purchasing Optimisation Critical Success Factors:
Time
Cross-functional teams
Supplier measurement system
Strategy development process that considers optimisation goals
Overall supply base vision with Senior Management support

9. Evolution of Sourcing Strategic Sourcing Traditional Purchasing
Global Supply
Management
Paradigm
Transaction
Project
Enablement
Focus
Price,
Transaction
management,
Compliance
Supplier rationalisation,
Spend consolidation,
Cycle-time reduction,
Standardisation
Balancing Total System Cost;
Maximising shareholder
value; Enabling product
innovation
Reach
Local;
Many suppliers
Multi-regional,
Some collaboration
with related functions
Global; Highly collaborative
across the enterprise and
visible at executive levels
Technology
Spreadsheets
Auctions, eSourcing,
Basic optimisation
Technology enablement
across all strategic sourcing
processes
People
Decentralised
Buyers
Commodity Teams,
Center-led or
centralised
Cross-functional teams
Global

10. Strategic Sourcing Process
Analyse
Spend
Identify
Requirements
Market
Implement
Strategy
Manage
Negotiations
Award &
Contract
Develop
Traditional
Procurement
Strategic
Sourcing
Supplier
Evaluation and
Selection
Management
Development

11. Analyse Spend Buyer Buying analysis across all divisions
Total number of suppliers used
Compare pricing across divisions
Consolidate spend, reduce suppliers and obtain better pricing
Tools
Spend Analysis

12. Identify Requirements
Buyer
Users - product and service requirements
Quality requirements
Product specifications
Service performance expectations
Identify different requirements across divisions
Consolidate opportunities
Tools
Specifications
Surveys
Interviews

13. Analyse Market Buyer Tools Specific market conditions
Rising input costs, capacity constraints, barriers to entry
Supply base constituents
Many players, dominant players
Analyse new products, services or diverse suppliers
Tools
Internet research
Benchmarking

14. Develop Strategy Buyer
Based on the internal requirements, industry dynamics
Negotiate with current supplier(s)
Bring in new suppliers
Bid
Reverse Auction
Traditional RFI, RFP, RFQ
Tools
eSourcing tools
Cross functional teams
Project Management

15. Manage Negotiation Buyer
Develop criteria for evaluating proposals based on internal requirements
Initiate negotiations under chosen strategy
Compare and rank results based on key criteria
Tools
Online RFX
Weights / Scoring Models
Standard templates
Reverse Auction

16. Award Contract
Buyer
Based on results, determine best overall supplier(s)
Cross-functional team decision
Finalise contract terms and conditions with suppliers
Involve finance and legal
Tools
Automated weights / scoring
Online contract management
Cross functional teams

17. Implementation Strategy
Buyer
Determine how contract will be rolled out
Change management strategy
Identify and track performance metrics
Communicate value to stakeholders
Tools
Supplier Performance
Supplier Portals
Spend / Diversity Reporting

18. Financial Analysis - When & Why..
When do it?
For critical items
For new suppliers
When pursuing longer-term agreements
For purchase requirements involving significant dollars
Why do it?
To manage business risk
To eliminate marginal suppliers early in the evaluation process

19. Ratio Analysis Profitability Liquidity
How profitable is the supplier? What rate of return is the supplier earning?
Gross and net profit margin
Return on equity
Return on investment
Liquidity
How capable is the supplier of meeting short-term cash needs?
Current ratio
Quick ratio

20. Ratio Analysis (Contd.)
Leverage
Is the supplier over-leveraged and capable of paying long-term obligations?
Debt to assets
Time interest earned
Fixed charge coverage
Activity
How effectively is the supplier managing assets?
Inventory turnover
Average collection period
Return on net assets

21. Contract Management Termination (Escape) clauses
Service Level Agreement (SLA’s)
Clear communicated specifications
Key Performance Indicators (KPI’s)
Feedback and review on a regular basis
Liquidated damages for poor performance

22. Risk Minimisation

23. Supplier Performance

24. Improvement Action Plan

25. Supplier Audit Check Sheet