Sourcing: Managing the Firm's Supply Base PDF

Sourcing: Managing the Firm’s Supply Base Felix Reimann Professor of International Business & Supply Management Please note: Some slides which are used in our sessions are not part of the handouts. This is typically due to confidentiality reasons. At the same time, the course pack does contain slid...

Sourcing: Managing the Firm’s Supply Base Felix Reimann Professor of International Business & Supply Management Please note: Some slides which are used in our sessions are not part of the handouts. This is typically due to confidentiality reasons. At the same time, the course pack does contain slides which will not be used in our sessions. This material might simply be of further interest for you. 2 “Introduction to Business” – Logic of the module Value Creation in Value Creation in Own Firm Supply Base Consumers / B2B Customers Focus on hierarchies Focus on markets On average ~50% of value creation for On average ~50% of value creation for manufacturing companies and ~60% manufacturing companies and ~40% across industries across industries Often >50% of environmental impact Course „Introduction to Business Course „Sourcing: Managing the Administration“ Firm‘s Supply Base“ 3 What do these 3 firms have in common? 4 Sourcing: Managing the Firm’s Supply Base Course Objectives  Understanding the role of the sourcing function and its contribution to firms’ competitive success  Understanding how the supply base links the firm to global developments and how to manage these interdependencies  Learning and applying key tools and frameworks for handling different sourcing situations  Strengthening your skill set in analyzing challenging sourcing setups, strategic thinking, and effective teamwork 5 Learning Architecture Self Study Developing and practicing your Sourcing in sourcing tool kit Practice Watch – Read – Do EY Guest Board Perspective Session ProcureTech Concepts and Guest Session Case Backgrounds Strategies and Tools for Spend Categories Growth & Networking Intense casework under Performing as team of different personalities tight time constraints (teams changing between assignments) 6 Course Agenda Cases / Guests Strategic Positioning Global Board Perspective Perspective Segmenting the Supply Base Managing EY Guest Sustainability Session Leveraging Pfizer Printers@WHU Competition Case Case Changing Sennheiser Strategies Demand Case for Spend Categories Cooperating with Suppliers BMW Managing Risks Case Digitalization & ProcureTech New Frontier ProcureTech Session 7 Grading In-Class  You will be working on several graded case Case Studies studies in this course. (10/100)  Detailed instructions for the cases will be Team-based provided in class. Out-of-Class  You will work on one quantitative case out-of- Case Study class. (10/100)  Detailed instructions for the cases will be Team-based provided in class.  The exam requires you to both recall and apply your learnings from the course. Exam  The Exam covers tools & frameworks, required (75/100) readings and videos, cases, and guest sessions.  We will provide mock questions (similar to the questions in the exam) for each week Individual  These will be assigned in class and might tasks include e.g., your participation in empirical (5/100) research projects. 8 Course Agenda Strategic  Importance & Goals Positioning Global Board Perspective Perspective Segmenting the Supply Base Managing Sustainability Leveraging Competition Changing Strategies Demand for Spend Categories Cooperating with Suppliers Managing Risks Digitalization & New Frontier ProcureTech 9 Typical misconceptions about purchasing The one hour that can change your life!  1 2 3 4 5 It is only Don’t care, It is only It is dull and Marketing is the interesting in want to go about administrative bright side big firms into Finance savings 10 M&A deals in the supply base to improve competitiveness – example from fashion industry 11 “Nexus suppliers” are a source of high risk in supply chains Tier 1 Suppliers “Nexus supplier” in lower-tier supply chain Our Firm 12 13 Typical misconceptions about purchasing 2 3 4 5 It is only Don’t care, It is only Marketing is the interesting in want to go about bright side big firms into Finance savings 14 Really? What does a Fashion Buyer do? A Fashion Buyer selects and orders the apparel and accessories that will be stocked in retail stores. As a Fashion Buyer, you typically specialize in a certain area, such as shoes or accessories, but your job responsibilities are the same no matter which field you choose. Although shopping for a living might sound fantastic, the job of a Fashion Buyer is not easy. You need a thorough understanding of your company's brand and values, and the ability to price and negotiate different products. You add to that spotting trends and a comfort with consumer psychology. Then you bring everything together to make purchasing agreements on items that embody your brand while guiding it in new, fresh directions that coincide with current and future fashion trends. Oh, and do that within the budget, please. But if you can do this, what a job! You are paid to travel to fashion shows, negotiate with manufacturers, and study the color and cut predictions for the upcoming seasons. You're responsible for deciding that this wedge heel will be stocked in brown and pink, but not blue. On the whole, you get to set the style direction for your brand, and help dictate what people will be wearing this season. Unlike a lot of fashion careers, this path is governed more by talent than connections, probably because your work is very easy to evaluate: If your picks sell, than you'll do well. If not, you might be looking for another position. 15 Typical misconceptions about purchasing 3 4 5 It is only Don’t care, It is only interesting in want to go about big firms into Finance savings 16 Purchasing a highly critical function for many startups Jule Willing + Eva Neugebauer (WHU alumna), Co-founder and CEO frischepost Markus Lamberti (WHU alumnus), built up procurement at HelloFresh 17 Humanitarian procurement – certainly with different focus areas  Ability to respond quickly and efficiently to emergencies due to streamlined procurement services  Procurement is critical to ensure that humanitarian operations have the right suppliers at the right time, at the right place, in the right quantity, and at the right price  Procurement to mean the purchase of goods, services and capital items, as well as the contracting of equipment, facilities, consultants, or services  Provision of high quality relief items from qualified suppliers and fast delivery thanks to pre-positioned stocks close to operations  Management of over 4,000 standard commodities and a number of non-standard items  Scope of services includes tendering, supplier selection, transportation to final port of entry, import and export, insurance, and inspection services Source: IFRC. 19 Typical misconceptions about purchasing 4 5 Don’t care, It is only want to go about into Finance savings 20 On average, purchased goods and services “eat up” 39.5% of sales Total spend as a percent of sales dollar by sector: Manufacturing 47.6% Process 38.2% Services 33.6% Overall Average 39.5% Supply management operating expense as a percent of total spend: Overall Average 1.5% Percent of total spend managed/controlled by supply management: Overall Average 86.3% Source: Source: CAPS Research Metrics of Supply Management www.capsresearch.org. 21  HENKEL PURCHASING FACTS & FIGURES 2021 14.7 bn € Operating ~ 35,000 Purchasing Spend Worldwide Suppliers With all Business Units & Functions 166,000 E2E along the Process Strategic focus on materials Source-to-Pay Digital & sourced Agility 22 22  MATERIAL EXPENDITURES BY BUSINESS UNITS MATERIAL EXPENDITURES BY BUSINESS DIRECT MATERIALS SPEND UNITS 9.0 BN EUR 14.7 BN EUR Purchased goods and services L ‐ Laundry & Home Care 1.1 bn EUR Indirect 13% 3.2 bn EUR Material & 21% Services 5.9 bn EUR 40% 2.0 bn EUR Packaging B ‐ Beauty 1.4 bn EUR 5.9 bn EUR 22% Care 9% 65% Raw 4.5 bn EUR Materials 30% A ‐ Adhesive Technologies 23 23  HENKEL PURCHASING OVERVIEW CATEGORIES – DIRECT SPEND Raw Materials Petrochemicals Oleochemicals Inorganics Hotmelts Silicones Solvents Fragrances Grain‐based Packaging Materials Bottles & Consumer Industrial Corrugated Printer papers Labels Tubes Flexibles injection metals Packs Contract Manufacturing & Traded Goods Laundry & Home Care Beauty Care Adhesive Technologies 24  HENKEL PURCHASING OVERVIEW CATEGORIES – INDIRECT SPEND Indirect Materials & Services Human Technical Professional Facility IT (software / Ware‐ Travel Marketing Fleet Utilities Resources Supplies Services Management hardware) houses Logistics Sea Freight Air Freight Road Rail Warehousing 25  Henkel in 2021: 2.5% savings on purchasing spend would have translated into a 16.8% EBIT increase Assumption: 1) Spend cut by 2.5% Fiscal Year FY 2021 minus 2021 2.5% in spend Sales (bn €) 20.0 20.0 Purchasing spend (bn €) 14.7 14.33 - 2.5 % EBIT (bn €) 2.2 2.57 + 16.8 % …and if EBIT would have been 1.0 bn €….?? Source: Annual Report Henkel 2021. 26 Typical misconceptions about purchasing 5 It is only about savings 28 Managing privileged access to inputs: Supply Management´s impacts can be grouped in three categories Lower Total Cost:  Piece Price “Cost Out”  Landed Costs  Total Cost of Ownership Increased Sales:  Faster to Market  Innovation “Value In”  Improved Quality  Sustainability  Pricing Flexibility  … Manage Risk:  Force Majeure  Transportation “Manage Risk”  Raw Material Prices  Sustainability  Currency Fluctuation  … 29 Course Agenda Strategic Positioning Global  Impact On and Of the Supply Base Board Perspective Perspective Segmenting the Supply Base Managing Sustainability Leveraging Competition Changing Strategies Demand for Spend Categories Cooperating with Suppliers Managing Risks Digitalization & New Frontier ProcureTech 30 The supply base connects the firm to global developments Influence on the supply base Developments regarding… Firm’s Supply Political environment Base Natural environment Social structures Economic trends Global infrastructure Externalities Influenced by the supply base 31 Rare Earth elements effect many high-tech supply chains 33  The case of rare earth elements: In fact, rare earths are not that rare… …but rarely mined and processed outside of China! 100% 100% 5% RoW RoW 62% 95% China Distribution of value added: 1. Mining: 95% in China 2. Separation of ores into oxides: 95% in China 3. Refining of oxides to metals: ~100% in China China 38% 4. Forming metals into powders: 75% in China 5. Manufacturing: 50-75% in China Rare earth reserves Rare earth production Source: USGS. 34 Severe supply effects of the war in Ukraine 35  Weather phenomena have substantial influence on raw material prices and availability too wet too wet USA too dry & warm too wet  Heat & cold  Wheat, corn, & too cold too wet soya prices 33- 40% up too dry too wet too dry & cold Columbia  Rainfall  Coffee price >60% up Brazil & Argentina India South East Asia & Australia  Aridity  Rainy season  Rainfall & flood  Corn & soya  Iron ore prices  Caoutchouc prices 75% up prices 30% up increase 43%  Price for coal increases Source: FTD. dramatically 36  Natural disasters: The global risk is increasing Total number of natural catastrophic events in the world Source: McKinsey 37  The supply base if often a very significant source of a firm’s total emissions Emissions produced in supply base For manufacturing companies often Source: Zevero account for 50% - 70% of total 38 emissions Course Agenda Strategic Positioning Global Board Perspective Perspective Segmenting the Supply Base  ABC Analysis  Kraljic Portfolio Managing Sustainability  Chessboard Leveraging Competition Changing Strategies Demand for Spend Categories Cooperating with Suppliers Managing Risks Digitalization & New Frontier ProcureTech 39 Basic quantitative segmentation approach: ABC analysis Here applied to procurement items (i.e., what we buy) A B C 100% 80% Procurement Spend / CO2 Emissions 60% % of… 40% 20% 0% 10% 30% 100% % of procured items 41  ABC analysis applied to suppliers, i.e., from whom we buy 100% 90% 80% Procurement spend / CO2 Eissions 70% 80% of Spend is distributed amongst 170 suppliers % of… 60% 50% 40% 30% 20% 10% 0% 0 100 200 300 400 500 600 700 800 900 1000 Nr. of Suppliers 42 Deriving recommendations from ABC analysis: BCG’s approach 43 Course Agenda Strategic Positioning Global Board Perspective Perspective Segmenting the Supply Base  ABC Analysis  Kraljic Portfolio Managing Sustainability  Chessboard Leveraging Competition Changing Strategies Demand for Spend Categories Cooperating with Suppliers Managing Risks Digitalization & New Frontier ProcureTech 44 Kraljic Portfolio introduces a perspective on risk and profit impact Kraljic Portfolio high Leverage Strategic products products Profit Impact Non-critical Bottleneck (routine) products products low low high Supply Risk 45 Kraljic Portfolio can be adapted for triple-bottom-line (TBL) impact Triple-bottom-line = Planet, People, Profit Original Kraljic portfolio TBL portfolio high high Leverage Strategic Leverage Strategic products products Impact products products on Profit triple- impact bottom- line Non-critical Bottleneck (TBL) Non-critical Bottleneck (routine) products products (routine) products products low low Supply risk Supply risk low high low high  Emphasis no longer on risk to profits alone but also on the other two elements of triple-bottom-line  Former leverage and bottleneck products may become strategic products 46 Course Agenda Strategic Positioning Global Board Perspective Perspective Segmenting the Supply Base  ABC Analysis  Kraljic Portfolio Managing Sustainability  Chessboard Leveraging Competition Changing Strategies Demand for Spend Categories Cooperating with Suppliers Managing Risks Digitalization & New Frontier ProcureTech 47  Purchasing Chessboard considers power between buyer and supplier – provides comprehensive overview of purchasing strategies Change nature of demand: high When a supplier has a monopolistic or oligopolistic position thanks to a unique technical advantage or exclusive market access. Buyer has to determine to what extent technical specs can be modified. Change nature Seek joint advantage of demand with supplier Seek Joint advantage with supplier: Variants depend on scope and intensity of partner- ship. Scope from coordinated demand and Supply power capacity planning to complete intermeshing of value chain. Intensity from projects to sharing of financial success and risk. Manage spend: Leverage competition Who buys what from whom as basis. Bundling Manage spend among suppliers within and across company boundaries as option. Question if demand is justified. Leverage competition among suppliers: Variations here are further fueling competition low through measures on the supplier market, or low Demand power high influencing supplier pricing through analytical tools. Source: https://www.kearney.com/web/the-purchasing-chessboard 48  Purchasing Chessboard – 16 levers Innovation breakthrough: high Whether a result of monopolies or patents, or Innovation Value chain Value because specifications are excessively geared to Re-specification breakthrough management partnership a single supplier, companies sometimes find themselves in a position of complete dependence. In cases of this kind, the only solution is an Integrated innovation breakthrough that will fundamentally Risk Technical data operations Cost partnership change the rules of the game. management mining Supply power planning Target pricing: Since only very few suppliers are prepared to Commercial Supplier pricing Co-sourcing Tendering disclose their cost structures, use of the target data mining review pricing lever will require alternative ways of determining cost structures. Depending on the initial situation, methods of varying analytical depth can be used to Demand Volume bundling Globalization Target pricing ascertain target prices. Some of these methods management call for expertise in statistics. low low Demand power high Source: https://www.kearney.com/web/the-purchasing-chessboard 49  Purchasing Chessboard – 64 methods Invention on demand: high Invention on Leverage Functionality Specification Value chain Revenue Profit sharing Strategic demand innovation assessment assessment reconfigura- sharing alliance network tion Patent-protected supplier. Alternative technical solutions to be developed Core cost Design for Product Design for Supplier Sustainability Project Value based analysis sourcing teardown manufacture tiering management based sourcing using ideas from all scientific fields. partnership Vertical Intelligent Composite Process Collaborative Virtual Total Collaborative integration deal benchmark benchmark capacity inventory lifecycle cost structure management management concept reduction Bottleneck Political Product Complexity Visible Vendor Supplier Supplier Supply power management framework benchmark reduction process managed development fitness management organization inventory program Sourcing Buying Cost data Standardi- RFI/FRP Expressive Total cost of Leverage community consortia mining zation process bidding ownership market imbalances Procurement Mega Master data Spend Supplier Reverse Price Unbundled outsourcing supplier management transparency market auctions benchmark prices strategy intelligence Compliance Closed loop Supplier Bundling Make or buy Best shoring Cost Factor cost Linear performance pricing: management spend management consolidation across generations regression analysis analysis Method for identifying the main technical cost driver for the purchasing price Demand reduction Contract management Bundling across Bundling across sites Global sourcing LCC sourcing Cost based price Linear performance of a group of materials. product lines modeling pricing low low Demand power high Source: https://www.kearney.com/web/the-purchasing-chessboard 50 We look forward working with you in the coming weeks!  Check Moodle regularly and make sure to prepare cases & readings (remember that in-class case work is graded!)  Coming sessions will be intense – engage in sessions and breakouts with high energy!  If you have questions or concerns at any time, contact us! 52