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 are the purchasing risks and
how to manage it?

What is your organisation total spend
each year?

What are you Out / In-sourcing?

What is the spend by category /
supplier? (Eg. raw materials, IT)

Whether your purchasing strategies
are aligned with business strategies?

What is the total acquisition cost
(TAC) & the life cycle cost of capital
purchases?

What percentage of your external
spend is managed by purchasing?


What is the value your suppliers
provide towards your organisation’s
success and reputation?
Do you assess the outcome of your
negotiations?

How do you develop your key
suppliers?
How to manage vendor
performance?

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





To determine the right mix of capable suppliers



Supplier integration
Collaborative agreements
Supplier development
Joint total quality/cost reduction efforts
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
Traditional
Purchasing
Strategic
Sourcing
Global Supply
Management
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
Paradigm
10
Strategic Sourcing Process
Supplier
Evaluation and
Selection
Analyse
Spend
Identify
Requirements
Strategic
Sourcing
Supplier
Management
Analyse
Market
Develop
Strategy
Supplier
Development
Manage
Negotiations
Award &
Contract
Traditional
Procurement
Implement
Strategy
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

Specific market conditions


Supply base constituents


Rising input costs, capacity constraints, barriers to entry
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
 How profitable is the
supplier earning?



supplier? What rate of return is the
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