A knowledge based approach to e-procurement - sasCommunity.org

A knowledge based approach toe-procurement

Impact of Procurement on CompanyProfitabilityProfit £5 M£45 MothercostsProfit £7.5 M£45 M+50%A 5% reduction in purchase cost canresult in a 50% increase in profitmargin.£50 Mtotalprocurementcosts£47.5 M-5%To achieve the same increase inprofit an organisation would have toincrease sales by 30%, reduceoverhead by up to 20%, orsignificantly reduce staff numbers.

…or to put it another way…Impact of SRM v CRMIf you operate at a Net Profit percentage of:3% 4% 5%To equalProcurementImpact of…These additional sales arerequired…£500 16,666 12,500 10,0001,000 33,333 25,000 20,0005,000 166,667 125,000 100,00010,000 333,333 250,000 200,000£25,000 833,333 625,000 £500,00050,000 1,666,667 1,250,000 1,000,000If your average customer purchases £1,000, you would need500 customers for a year to drive the same profits you drive ifthe purchasing function can save just £25,000

Why SRM mattersSource: CAPS & Gartner Group

Business ChallengesMergers & acquisitions Pressure to cut costsGlobal economy Your organisation Supplier’s & customer’s organisationsNew business channels Internet Outsourcing

Procurement is too often absorbed bythe daily business...Non value-addingOrder processingMonitoring of delayed deliveriesProblem escalation and resolutionDiscussion and management ofdelivery, quantity and specificationchangesReporting and Analysis...Value addingIdentification, search and rating ofsuppliers and procurement marketsNegotiation of prices and conditionsSupport of value analyses and costreduction projectsEnsures total cost of ownership view(TCO)Co-ordination of purchase poolingSupport of make or buy decisionsDefinition of warehousing concept

“Clearly, we are no longer in thenarrow business of purchasing ...we are now in the strategic businessof supply management.”Paul NovakExecutive Vice President NAPM - 1998

Supplier StrategiesStrongMarket RiskInfluence on Customer Satisfaction51LimitedLeverageProduction InventoryCapital EquipmentNon-Critical1 5AmpleNon-Direct or MROProcurement RiskMarket/Product ComplexityStrategicCritical Technology•single source•sole sourceBottleneckObsolete SparesEnd of CycleLimitedSource: Adapted from Grieco, 1995; Krechevsky, 1996

Supplier StrategiesStrongMarket RiskInfluence on Customer Satisfaction51LimitedLeverageFocus = Cost of MaterialStrategy = Price LeverageNon-CriticalFocus = Cost of AcquisitionStrategy = Consolidation orE-Commerce1 5AmpleProcurement RiskMarket/Product ComplexityStrategicFocus = Cost of PerformanceStrategy = Partner/AllianceBottleneckFocus = Cost of OperationStrategy = Minimize RiskLimitedSource: Adapted from Grieco, 1995; Krechevsky, 1996

Many BuyersSupplier StrategiesOne BuyerStrongMarket RiskInfluence on Customer Satisfaction51LimitedLeverageNon-Critical1 5AmpleProcurement RiskMarket/Product ComplexityStrategicBottleneckLimited

Need to know:“Who buys what from whom”Supplier nSupplier 2Supplier 1Purch dpt nPurch dpt 2Purch dpt 1Comm 1 Comm 2 Comm n

New Strategies for the ProcurementProcessOrdering/Paying‣P-cards‣E-procurementNeed to knowSpend/# transactions•by year•by supplier•by buyersSourcing‣E-SourcingSpend/# transactions•by year•by supplier•by buyers•by product

E-Procurement StrategiesSystematicSourcingHow Businesses BuyMRO HubsYield ManagersCatalogue HubsExchangesSpotSourcingIndirect Goods/ServicesHorizontal HubsDirect Material (Production)Vertical HubsSource: Mohanbir Sawhney and Steven Kaplan, HBR 6/00What Businesses Buy

SRM Opportunities with E-commerceFragmentation of suppliers and a company’sbuyers is another stumbling block forimplementing e-commerce.Companies frequently lack an overall picture oftheir total spending with a given supplier.Therefore, they can’t take advantage of discountsavailable under corporate purchasing contracts.Reference : Computerworld 12/21/99

Comprehensive procurement analysisStrategicProcurementSpend AnalysisDetermine BusinessRequirementsConduct MarketAnalysisDevelopCategoryStrategySelectSupplier&NegotiatePlanTransitionMonitor toMeasureBenefits&EnforceBusinessEvolution,ProcurementEvolutionInfrastructureOptimisationStrategyProcessTechnologyOrganisationPeople & Culture

The Information ChallengeWhat do I know about my suppliers? Who are my top suppliers? What are my most common commodities? How can I leverage my spend?• How much am I spending with a given supplier?• How dependent are they on my business?• Are any suppliers linked to a common family tree? Which suppliers are at financial risk?

The ProblemData issue Data is not organised to give accurate, consistentand timely information Aggregating information at an entity-/commoditylevelis difficult Linking entities accurately to a family tree is nearimpossibleTechnology issue Operational systems are not built for effectivedecision making

Knowledge creationFlexible managementreportingMaintain single consistent viewof suppliers and suppliesAdd intelligence to the dataClean & standardise dataConsolidate disparate data

Understanding your PurchasingERP/MRPE-CommerceLegacyPcards

Solution forSupplier Relationship ManagementERP/MRPE-CommerceLegacyPcardsConsolidateTransaction DataData Standardization& Enhancement

Supplier Data IssueAccuracy/consistency “It had 113 separate entries for AT&T alonebecause different people would enter it as A.T.T orATT or A T and T” “It took 1,000 hours to weed through it.Using typical wages ... thatone aspect of data quality cost theproject about $100,000.”“Unifying Legacy Mix”, Computerworld magazine, April 1997

Clayco Inc.Subs idiary12-000-0005Corporate “Family” LinkageCeramico Inc.Branch14-444-4445CCG CorpUltimate10-000-0000Ceramico Inc.Subs idiary18-000-0008Ceramico Inc.Branch18-333-3336Glazeco Inc.Subs idiary18-000-0007D-U-N-S ® Numbers“link” corporatecompanies, divisions,and branch locations.Glazetech Inc.Branch17-777-7778Glazetech Inc.Subs idiary14-000-0009Glazetech Inc.Branch17-000-0001

Supplier Data Enrichment❑❏❏❏❏❏Risk InformationDemographicsGeographicDependency RatiosHistorical InformationUpdated regularly

Commodity Data Issue32200010-MOBILMET GAMMA CUTTING OIL $5,402.0011101402-GREASE OZ. TUBE L1DOKEP1 $13.0932100405-SPINDLE OIL SPINESSTIC10 $435.0932200012-R + O CIRCULATING OIL TERESSTIC 32 $234.3432100510-THREADKUT 99 CUTING OIL $12.0932100080-TELURA 619 L80 MINERAL OIL $12,465.0932100405-SPINDLE OIL SPINESSTIC10 $908.54GX 80-90 GREASE-GREASE GEAR $251.65S/FW 10/30-S/FW 10/30 MOTOR OIL $325.8832100405-SPINESSTIC 10 SPINDLE OIL $235.7632102295-ES1477 LB 165Y24 UCON GREASE $4,123.98150 FLEX NBV15-KLUBER LUBRICATION $5.09157440-3-PROCESSED OILS FROM EVAPORATOR $134.0932102295-UCON GREASE ES1477 LB 165Y24 $4,365.87VALVATA J680-GREASE SAME AS CYLESSTIC TK680 $235.08TOTAL ?

Product and Service Identification❑❏❏❏❏❏Products and servicesComprehensiveGlobal focusPublic domainCentrally maintainedWidely accepted

UN/SPSC Structure23000000 Industrial Mfg. and processing machinery 1, 234,853.2723170000 Metalworking machinery, equip & supplies 375,853.2723171600 Metal cutting machinery 34,373.0723171610 Reamers 4,500.98The hierarchical structure ofthe UN/SPSC enables spendrationalisation to occur atmultiple levels

Other Classification SchemasSIC - Function Based752199 Shoe Repair 302102 Mfg rubber shoes566100 Shoe Store Retail 311102 Mfg leather shoes513900 Footware, Wholesale 56610101 Custom Shoes RetUPC / EAN - Inventory Based32 4563243 77 Acme Size 09 White Leather Woman’s- w/ buckle92 8376152 08 Dexter Size 12 Brown Leather Men’sUN/SPSC - Commodity Based53111600 Shoes

Result..What Am I BuyingProfessional Tool Company123 Main StreetAllentown PA 18067DUNS 345213110Actual Spend 3,200,000Total Sales : 10,000,000Dependency Ratio: .32Active Lawsuits PresentFinancial Risk: HighUN/SPSC 23171603Pipe or tube cuttersSpend 1,300,000UN/SPSC 23171512Welding RodsSpend 1,700,000UN/SPSC 23171517Blow TorchesSpend 1,200,000

An Information Strategyfor Supplier Relationship ManagementProcurement Scoringand AssessmentSpendAnalysisSupplier PortfolioOptimizationSupplier RankingProcurement Data MartData Standardisation & EnhancementIntelligent DW Procurement Templates

Supplier Relationship ManagementBusiness processes Sourcing Ordering PayingOperational systemsInformation systems