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How Industrial Equipment Suppliers Can Implement Procurement Best Practices to Reduce Risk and Improve Cost Structures
By Florian Kache, Lars Bettermann and Ralf Mgerle
Introduction
The manufacturing industry continues to feel the strain of a saturated western market and competition from emerging markets, particularly those in Asia. As a result, tier-one suppliers have adopted new procurement strategies such as supplier collaboration, in an effort to cut costs. Tier-two suppliers are following suit and discovering that optimized and transformed procurement organizations can help them beat the competition.
This report examines current challenges in Direct Material Sourcing, including increasing technological complexity, a strain on raw materials, and the need for better procurement risk management. It outlines procurement best practices in general and for specic categories of goods, and the paper covers procurement risk management strategies. Primarily focused on the automotive sector, these ndings and insights are applicable in other industries that involve industrial equipment. Accentures experience with Direct Material Sourcing shows that suppliers at all levels should collaborate more to reap the benets of a global supply chain, and they should take a varied approach to sourcing different categories of parts. For instance, they could differentiate between suppliers of high-tech and low-tech parts and implement separate processes for procuring goods that contain different raw materials. In addition, suppliers can potentially benet from sharing certain information in the supply chain, ensuring the supply of raw materials and conducting effective procurement risk management. low-tech parts from best-cost countries, having them assembled in the region they are purchased. And they manage a base of suppliers of complex parts from developed countries. Suppliers of complex parts should meet requirements regarding exibility, and they are usually asked to contribute ideas for design and functionality. In some cases, a supplier should consider acquiring a raw materials company in order to secure the supply. By doing so, the supplier has the opportunity to gain a vital advantage for some commodities, particularly the rare earth compounds that are vital for the electronics industry.
External Challenges
Raw Material Management
Like any other major industry, the automotive sector is affected by increasing cost pressure from raw materials. The uctuations in the price of raw materials have caused cost-target uncertainties. As a result, companies are using a range of strategies such as negotiating xed prices with periodical adjustments, implementing advanced buy /sell processes, and setting up hedging departments.
Internal Challenges
Supplier Collaboration
Depending on the size of the company, a change in mindset may be needed for a tier-one supplier and beyond to engage with upstream offshore suppliers. Whereas large multinationals may be accustomed to cross-border collaboration, medium-sized companies may be reluctant to do so. They may lack the right timing and expertise to evaluate the supply base within best-cost countries and expand respectively. However, some companies have gained experience in expanding their supply base in eastern Europe, and this may prove a good starting point for further expansion in best-cost countries.
players in the supply chain. In fact, those that do share this information are often regarded as exotic, since they appear to have given away the heart of their business. However, this ignores the true benet that sharing selected information with selected, preferred suppliers can bring for optimizing products and processes.
Risk Management
Although risk management is widely embedded into the strategies that suppliers use, the value of procurement risk management is often underestimated. It is crucial for suppliers to have a backup procurement plan in place to ensure business continuity, since the risk to the supply chain presented by upstream suppliers can be substantial.
Global Competition
Automotive suppliers have also felt increased pressure from growing competition in Asia, especially from China and India. At the same time, they have beneted from the lower prices offered by new players in best-cost countries. Suppliers could seize the potential advantage of this opportunity by sourcing from best-cost countries, which could have the effect of driving prices down through low labor costs for complex parts.
They map out the amount spent with individual suppliers, analyze that data and understand the percentage of their procurement budget that goes to each supplier. Based on the analysis, companies eliminate suppliers off the so-called tail end of the spend list e.g. they cut off those suppliers with whom they spend the least, considering that the parts can be produced at an incumbent supplier. Companies Accenture has worked with have saved an average of 10% to 15% on costs by rationalizing the preferred supplier list and improving compliance toward preferred suppliers. In some cases, companies choose to consolidate the supply base with an acquisition of an upstream supplier that ts within its growth strategy. Overall, consolidation helps achieve procurement targets by reducing the number of upstream contacts and increasing overall supply chain reliability.
Supplier Relationship Management: Cutting off the long tail end of suppliers
Long tail end supplier reduction program
Identify
C B A
Classify
Supplier Classification
Implement
Supplier to-be
A B
B+ B-
A
Supplier as-is Supplier X Supplier Y Supplier Z Supplier Z
B+
C
Demand type 1 time Repetitive Repetitive Demand Mapping Table
Identify C suppliers by region Validate A and B supplier structure by category Confirm A, B, C structure with key stakeholders
Classify demand pattern in 1 time and repetitive Assign demand types to supplier classifications Communicate supplier reclassification
Develop supplier replacement mapping tables Communicate list of obsolete suppliers to requestors Block suppliers in ERP systems and communicate Confirm savings by supplier reallocation
Typically, Accenture is able to realize 10% - 15% of procurement budget savings by rationalizing the preferred suppliers list, improving compliance to preferred suppliers/contracts, increasing procurement control over long tail of spend and reducing operating cost
professional relationship with their suppliers, constantly challenging them to achieve better results and working to develop those suppliers that show growth potential. Both parties benet, since priority business contracts may be offered to select suppliers in return for continuous price reductions and reduced supply risk.
In addition to the seven general best practices discussed above, topperforming automotive suppliers have dened specic approaches for sourcing particular types of goods, depending on their category and the commodity materials used to create those goods.
The next section of this report looks at two different approaches to sourcing distinctly different categories of goods. First, we examine sourcing strategies for electronics, which in this case means simple products with a large number of suppliers, but products with a high raw-material cost. Second, we look at strategies best suited for molding, which is a complex product with a fragmented supply base and high raw-material costs. These categories electronics and molding differ in the size of the potential supply base, supplier behavior, and in category complexity, to name just a few areas. Therefore, they are wellsuited for illustrating in-depth a variety of best-practice sourcing solutions. Ultimately, the characteristics of each good could help form a baseline for determining the right sourcing approach.
During the course of a project, Accenture works closely with the clients to develop dozens of re-usable, commodity-specic documents to improve the clients sourcing process, also aiming for longterm improvements beyond the project timeframe.
Electronics At a Glance
Throughout the report, the term electronics refers to electrical components such as Printed Circuit Boards (PCBs), interconnector cables and LEDs.
The electronics category is characterized by an abundance of suppliers that are capable of manufacturing according to a customers specications. Parts are generally of low to medium complexity and have a high degree of standardization (e.g. catalogue items). Tier-one suppliers are able to exploit their bargaining power over their upstream suppliers due to supplier interchangeability. Upstream suppliers increasingly respond to this threat by consolidating their own upstream supply base or by building alliances with their peers. Relationships between tier-two suppliers and their upstream suppliers are primarily focused on price and only secondarily on securing supply for the electronics category. Currently, top tier-two suppliers focus on sourcing these materials from bestcost country suppliers, since they have the necessary technology and can provide capacity as needed.
with SMEs and bypassing distributors may be more cost effective, even if it can be difcult to identify which SME to work with. High performers quickly identify the suppliers managed through distributors and request a direct quote for comparison. This process step may lead to direct sourcing or provide tougher bargaining power with distributors.
Request RFQs regularly to gain an overview of the current market situation and identify further savings opportunities. They also require that their suppliers propose a minimum number of cost-saving initiatives per year. Actively manage and challenge upstream suppliers to reduce the raw material content in each component through small design changes and by reconguring their production processes. They use best-cost country suppliers since the parts can be switched easily and suppliers there have lower processing costs for raw materials and end products.
Leverage or Go Around
Capacities in the electronics market are increasingly driven by small and mediumsized enterprises (SME) and to a lesser extent by large-scale multinational suppliers. Due to their size and lack of international sales capabilities, the SMEs rely on distributors to market their products. Distributors may charge a service premium of up to 8%, claiming that they received a better price for the downstream supplier due to contract bundling. However, negotiating directly
Molding At a Glance
The term molding in the automotive industry typically refers to products that include thermoplastic raw materials, such as plastic resin. Examples are gasoline tanks, pistons, switches and pins.
Molding products fall into various subcategories, such as blow molding, rotational molding, extrusion molding and injection molding. Here, we will examine injection molding. Injection molding can require sophisticated, highly customized and maintenanceintensive tools for each part, depending on the size of the part. Compared to the electronics category, which is somewhat easy to manage due to its high level of standardization of parts and the abundance of suppliers, managing suppliers in the molding category is more complex. The market is supplier driven, given the shortage of specialized suppliers and a lack of global capacity for high precision molding machines. Given this market situation, tier-one and tier-two suppliers need to take differing supplier capabilities into account when dening cost-cutting measures or considering an acquisition. Currently, suppliers are focused on acquiring molding capabilities (e.g. machines) and developing new suppliers to overcome the capacity bottleneck.
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Companies typically underestimate the impact of risk on procurement performance. Nevertheless, the focus has returned to proactive risk management as a result of the recent economic downturn.
The most common and volatile areas of procurement risk are upstream supplier reliability and price uctuation. Therefore, top companies anticipate upstream supplier risks, both nancial and logistical, and protect themselves with contingency plans. They build strong supplier relationships that may even include an offer of replacement business if contracts are moved unexpectedly.
In addition, they keep upstream suppliers of complex products from gaining too much bargaining power by building loyalty with bundled business contracts and awarding related business (such as a stamping contract for pins along with an award for parts molded around that metal pin).
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The Masters Approach to Procurement Risk Management: A Study by Accenture and MIT
Research into procurement risk management conducted by Accenture and the Massachusetts Institute of Technology identied several leading practices for successful procurement. The two partners surveyed 127 chief procurement ofcers at global, industrial companies around the world. The research showed that procurement masters avoid price volatility and use external data to support their risk analyses. And they do so without overinvesting in IT for procurement risk management. Finally, masters excel at anticipating, monitoring and mitigating risks in a variety of ways.
Mitigation Capabilities
Masters typically:
Integrate the organization in case of incident of mitigation plans Develop a process to measure the impact of incidents and alerts, to continuously improve risk management Emphasize development of mitigation plans for critical key suppliers
Please refer to the Accenture Study High Performance in Procurement Risk Management (2010) for further details.
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Conclusion
Accentures experience with Direct Material Sourcing suggests that suppliers should collaborate more to successfully navigate future markets and reap the benets of globalization while operating a sustainable supply chain.
Technological complexity is increasingly seen as the main differentiator for supplier selection: Best-in-class suppliers source low-tech parts with a focus on cost from upstream best-cost country suppliers, assembling parts locally. They manage a supply base for complex parts in western countries, allowing some upstream suppliers to be involved in component design. Leaders also strive to closely involve all parties in the supply chain through information sharing. This creates transparency and opportunities for process improvement. In addition, efcient raw material management strongly contributes to a suppliers market share, and some suppliers benet from their global proximity to raw material mines. Companies are advised to secure a supply of raw materials for the long term, balancing that cost with the resources needed.
With trustful relationships, upstream suppliers may even help their downstream partners choose raw material mixtures that will improve quality and reduce prices. Finally, leading suppliers actively manage risk in the procurement process. They anticipate and react quickly to changes in the market and develop non-exploitive relationships with suppliers to improve their cost-benet ratios. By implementing these proven best practices, companies can operate a sustainable supply chain and gain a competitive edge. For more information about how Accenture can help your purchasing department become a driver of high performance, please contact the authors.
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Lars Bettermann
Lars Bettermann is a Senior Manager in Accenture Management Consulting. He is based in Cologne, Germany, and has vast experience in the Auto- and Industrial Equipment industry. His main focus is on challenges within Sourcing and Procurement such as Global Strategic Sourcing, Procurement Transformations and Process Excellence. During the last 12 years he has gained experience both in consulting as well as industry and has lived abroad several years. He can be reached at lars.bettermann@accenture.com.
Ralf Mgerle
Ralf Mgerle is a Partner at Accenture and is leading Accentures Sourcing & Procurement Management Consulting Practice in Austria, Switzerland and Germany. His last 19 years he spend in Sourcing & Procurement helping clients in several industries becoming high performing in Procurement. Based in Zurich, Switzerland, he can be reached at ralf.magerle@accenture.com.
This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specic circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative.
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About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with approximately 236,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the scal year ended Aug. 31, 2011. Its home page is www.accenture.com.
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