Hcm works -_supplier_management_programs_webinar_april_2010

Supplier Management Programs
Cost Saving Partners not
Cost Cutting Adversaries

Accurate Facts Lead to Accurate Decisions.

Tara Lamboley
Moderator

Marketing communications strategy and business
development consulting firm.

Partners with industry-leading companies to develop
and deliver best-of-breed Webinar content focused on
business growth.
For more information, go to:

www.integratedmarcom.com

or email

tara@integratedmarcom.com

Copyright 2010 HCM Works Inc.

Today’s seminar will focus on
Why a Supplier Management Program is essential to increased
performance and reduced risk

Proven strategy for effective supplier management segmentation

Key components of an effective Supplier Management Program

Strategies to balance cost reduction with
"It's interesting that the more
supplier innovation technically sophisticated we get, the
more it is about enabling relationships.
Win-win is replacing the old idea of
How proactive management of supplier beating up your suppliers. You can't
cost-cut yourself into prosperity."
performance and contracts drives bottom-
Carol Park, Vice President of Industry
line results Strategy for PeopleSoft/Oracle


Kimberly Smokey
Director of Value Creation

SVP and Director of Corporate Services Supplier
Management with Wachovia Bank with responsibility for 21
Indirect Services categories

20 Years Finance, Insurance, REtail (FIRE) and government
industry experience;
11 years global sourcing and procurement strategies
Extensive global management experience in 17 countries
throughout North America, South America, EMEA, and
ASPAC

Proven record of success for developing effective strategies
and operational efficiencies to drive profitable business
growth


Ted Weyn
Managing Partner
Over 20 years Indirect Services Procurement
Consulted to firms such as: Experience

Entrepreneurial Innovator for organizations who
pioneered Staffing Industry VMS Software, Statement
of Works electronic processing and req-to-check
procurement systems.

Founded HCMWorks to help organizations better
leverage the opportunities within Indirect Services
Procurement
Consulted to dozens of Fortune 500 and International
Organizations in gaining greater efficiencies within
indirect services processing.


Who is HCMWorks?
HCMWorks helps procurement departments gain greater control over indirect
& expenditures to gain a competitive advantage in their industry.
A consulting, advisory and outsourced services provider focusing on the
analysis, strategic direction, implementation and management of indirect
services expenditures.
Founded on the basis that Indirect Services Expenditures were an untapped
opportunity.
Seasoned experiences with a track record of proven success.
Recognized Pioneers in the vendor management industry.


Poll Question 1

How would you rate the effectiveness of your
Supplier Management Program?

Extremely Effective

Effective

Somewhat Effective

Ineffective

Don't Have a Program

0% 10% 20% 30% 40% 50% 60%


Supplier Management Program (SMP)
As a company develops into a capable global
competitor, it often restructures its supply base
to optimize competitive advantage. The
primary focus of the restructuring effort should
be on reduction of total cost, not purchase
price. In addition to reducing total cost,
improvements in supply base service levels,
quality, reliability, and access to technology are
also achievement goals.

Excerpt from HCM white paper series,


Supplier Management Vision

To develop and implement a world class supplier management program
that promotes needed to create
a .

“We strive for nothing less than excellence in quality.
It may take time to obtain the level of quality we
require, but we expect our supplier’s goal to be for
continual improvement. We won’t accept anyone
remaining at status quo if the level of quality is less
than perfect.”


Program Components

The constructs of developing an effective Supplier
Management program include:

Supplier Segmentation
Risk Management
Metrics Management
Expense Management
Performance Management
Demand Management


Program Objectives

Mitigate risk
Standardize services and pricing

Enhance the business relationship
Ensure quality products/services are received

Develop long and short term strategies

Manage performance with clear objective performance targets and periodic
assessment


Supplier Segmentation
Strong supplier relationships are characterized
by a high level of trust, mutual respect, open
and efficient communications, shared risks
and rewards, commitment to each other's
success, and the ability to constructively deal
with differences.



Segmentation Models
A segmentation model needs to be developed to uniquely address each companies business
imperatives. Many models have been created to address differentiating factions, such as:

Growth-Focused: Relationships able to drive growth through innovation and fund growth
through cost cutting.
Three Dimensional: Initial segmentation used to allocate scarce resources, second dimension
is to determine relationship type and the third dimension is to tailor a relationship approach
needed to maximize results.
Risk Management: Targeted approaches addressing specific/potential risk drivers.
Multi-Dimensional: Segmentation created using multiple variables including spend,
relationship, and product complexity.
Potential-Based: Look towards large, aligned suppliers for potential strategic advantage.
Product Development: Relationships leading to development of commercially viable
technology.
Performance Based: Clear decision rules around supplier segment mobility
Material Based: Commodity-based tiering places suppliers according to their product's life cycle
and strategic value.
Sourcing Process Step: Used as a standard opportunity analysis step in each strategic
sourcing initiative


Selection Criteria
• Production/Service facilities and capacity Off-Shore requirements and Capabilities
Age, type of equipment, and personnel, Business policies for contingency and
etc continuity
• Financial stability Ability, process and base line for handling,
• Product/Service quality and corresponding rush and off-hour requests
philosophy Industry ranking
• Technology compliance to Bank systems Major customers and suppliers
requirements Managerial skills and performance
• Operating efficiency Sub-contracting requirements
• Cost and overhead structure Commitment to diversity initiatives
• Joint Venture / Co-Development capability

Once all the above has been gathered and analyzed, the selected supplier(s) should qualify for the 5 “rights

Right price
Right quality
Right quantity
The single most important outcome in the strategic sourcing process is the selection of
Right time
the right supplier
Right source


Selection Considerations
Build and maintain internal alignment. Before entering a partnership, identify stakeholders and
involve them.
Evaluate the “relationship fit”. Look beyond traditional buyer-supplier relationship to how
potential partners fit strategically and financially with your company.
Build a strong relationship while negotiating an optimal deal. Success is difficult to achieve if
the relationship is adversarial.
Establish common ground rules, processes and protocols.
Have dedicated Alliance Managers to include responsibility of managing day-to-day
relationship issues, not just operations and business strategies.
Encourage collaboration in conflict resolution, negotiation, problem solving, and conducting
difficult conversations. A collaborative mindset needs to be established at the corporate level
so problems are mutually addressed, not framed as “ours” or “theirs”.
Identify and discuss multiple Supplier relationships. Sometimes a partner is also a competitor,
customer and/or supplier so determine the breadth of the relationship and manage accordingly.
Periodically review the health of the alliance by conducting joint reviews to assess business
goals and the quality of the working relationship.
Identify and manage change. Significant business changes, such as executive moves,
organization restructuring, or shifts in competitive or regulatory environment is inevitable. Plan
for how changes will be communicated and managed.


Segmentation Categories
Value from different types of
suppliers are achievable only High
after suppliers have been
mapped to an appropriate
strategy and should be Collaborative
Strategic
Supplier
Relationship
according to the strategic Alliance

ortance
ake /
value of the relationship. This

Strategic Impo
Value at Sta
methodology should be
institutionalized at all levels of
Transactional Custom
Supplier Management and Relationship Relationship
Sourcing to minimize resource
allocation on non-strategic
supplier relationships. Four
Low High
commonly used segment Cost / Difficulty of Switching Suppliers
categories are li t d b l
t i listed below


Segmentation Category

Strategic Collaborative Custom Transactional
Alliance

• Cross-firm • Cross-firm • LOB-specific or • May or may not be
• Limited alternatives • Low/moderate concentrated market leader
switching costs • Large spend • Commodity easily
• Important to
• Important • Important replaced
corporate strategy
commodities commodities • Solid performance
• Solid performance • Solid performance • Switching costs • Contracts of varying
• Strong market • Good market assessed by project lengths, but on
standing standing • Experience with average < 1yr
• Long term contract • Mid-term contracts LOB • May be LOB niche
• Spend • Category spend • Inter-dependency or enterprise, but
concentration concentration with other utilized low switching cost
• Client relationship suppliers • Product/Service
• Client relationship
• Limited long-term • Limited long-term little/no customizing
• Joint revenue and co-investment co-investment
venture strategies potential potential


Category Overview


Supplier Risk Management

The leaner and more integrated supply
chains become, the more likely it is that
uncertainties, dynamics and accidents in one
link will affect other links in the chain.



Risk Management Strategy
The concept of supplier risk management is still relatively new, as business strategies go. But in the
era of global sourcing and volatile markets, supplier risk management is rapidly becoming every bit
as necessary to global supply chains as in-house corporate risk management.

Today’s supply chains face risks from many factors, including:
Increased globalization through outsourcing, which elongates end-to-end supply chains
Additional regulatory compliance imposed by government entities, further complicating
international trade
Increased levels of economic uncertainty, which create additional variability in demand and
supply and make it more difficult to accomplish demand supply balancing
Shorter product lifecycles and rapid rates of technology change, which increase inventory
obsolescence
Demanding customers who have created additional time-to-market pressures by requiring
better on-time delivery, order fill rates and overall service level efficiencies.
Supply side capacity constraints, making it more difficult to meet demand requirements.
Natural disasters and external environmental events, which can wreak havoc on global supply
chains.
Potential regulatory risks posed from supply chain practices associated with future regulatory
non-compliance, e.g. environmental regulation changes


Risk Management Categories

Category Examples
Forecast errors, component/material shortages, capacity constraints, quality problems, machine
failure/downtime, software failure, imperfect yields, efficiency, process/product changes, property
Operational/ losses (due to theft, accidents, etc.), transportation risks (delays, damage from
Technological handling/transportation, re‐routing, etc.), storage risks (incomplete customer order, insufficient
holding space, etc.), budget overrun, emergence of a disruptive technology, contract terms
(minimum and maximum limit on orders), communication/IT disruptions
Labor shortages, loss of key personnel, strikes, accidents, absenteeism, human errors, organizational
errors, union/labor relations, negative media coverage (reputation risk), perceived quality,
Social
coincidence of problems with holidays, fraud, sabotage, pillage, acts of terrorism, malfeasance,
decreased labor productivity

Fire, wild fire, severe thunderstorm, flood, monsoon, blizzard, ice storm, drought, heat wave,
Natural/Hazard
tornado, hurricane, typhoon, earthquake, tsunami, epidemic, famine, avalanche, volcanoes

Economy/ Interest rate fluctuation, exchange rate fluctuation, commodity price fluctuation, price and incentive
Competition wars, bankruptcy of partners, stock market collapse, global economic recession
Liabilities, law suits, governmental incentives/restrictions, new regulations, lobbying from customer
Legal/Political groups, instability overseas, confiscations abroad, war, tax structures, customs risks (inspection delay,
missing data on documentation)


Risk Management Models
1. Deterministic analytical models, which include mathematical programming
models (e.g. linear, nonlinear, integer, dynamic programming). Applications to
supply chain include scheduling production, distribution planning, raw material
sourcing, facility location, inventory level setting, replenishment timing and
order quantity specification, and resource balancing.

2. Stochastic analytical models, where at least one of the variables involves
uncertainty, and is assumed to follow a particular probability distribution.
Examples of supply chain applications include inventory and production
management problems, where demand and yield are represented as random
variables respectively.

3. Economic models, which tend to be focused on buyer-supplier relationships.
These models have a traditional base in determining the financial risks to
either sellers or buyers, given various assumptions.

4. Simulation models, which are (usually) data driven representations facilitated
by sampling from specified probability distributions.


Metrics Management
One of the key goals of businesses today
is the collection and delivery of the
metrics decision makers need to make
timely, informed and well-reasoned
choices. The quality of these metrics
depends on three factors: accuracy,
timeliness and presentation.

Excerpt from HCM white paper
series, Supplier Management
Programs


Metrics Objectives

Establish an operating model which allows you to scale better

Understand the key drivers of output

Consistently managing the unit to your operating model

Identify a set of early warning signs that can focus your attention

Opportunity to move to best practices

Know when you need to add staff or other resources


Metrics Delivery
Linkage Between Goals and Metrics: Fundamental to a successful performance
measurement system is a foundation in measurable goals that are tightly linked to the most
critical corporate objectives.

Controllable and Measurable Metrics: Setting clear performance targets for each metric
gives owners an unambiguous achievement standard with a high level of internal accountability
by providing instant, granular visibility into its effectiveness.

Individual Accountability: When an individual is assigned responsibility for each metric, the
notion of accountability moves from theory to practice. With direct visibility into individual
performance (and potential implications for linked compensation), incentives are aligned to
force problem ownership and speedy resolution.

Forced Trend Analysis: Forcing regular data-based assessments of progress against a suite
of metrics helps detect emerging challenges in a timely fashion, rather than relying on intuition
or deferring to anecdotal explanations of “what happened last year.” Simultaneously, this
approach enables the function to provide a cogent and holistic situational assessment of
marketing performance to the wider organization at any given time.


Metrics Collections


Poll Question 2

What were your above contract
cost savings last year?

12% Above

From: 10% - 12%

From: 5% - 9%

From: 1% - 4%

Zero

0% 10% 20% 30% 40% 50%


Expense Management
BAD habits are developed in GOOD times,
GOOD habits are developed in BAD times!

Operating changes, such as developing
individual accountability and improving data
analysis, can drive benefits now. Structural
changes, such as simplifying operations and
improving processes, can deliver sustainable
value.



Overview

Expense management actively employs market trending to identify
changing utilization, product enhancements, altering market structures
and supplier mergers/acquisitions/divestitures to evolve existing
relationships, where applicable.

With scrutiny on cost reduction, expense management professionals are
in a prime position to drive transformational changes that result in both
Immediate savings as well as sustainable long-term value.


Expense Management Process

Step 2: Step 3: Step 4: Step 5:
Step 1: Trend Goal Planning & Follow Up
Analysis Review Setting Organizing & Control

Expense Management has to be done as a partnership between Global Supply Chain,
the business unit leads and the supplier managers to ensure consistent measurement
criteria are applied to all suppliers and process.


Supplier Performance
Management
Supplier performance management sets the
expectation that the suppliers understand
the customer needs and expectations, to
result in performance and competency
growth and foster a value add strategic
partnership.



Overview
Supplier performance management brings together the components of
supplier segmentation, risk management metrics management and
consequence management, to actively manage important supplier
relationships in a consistent, objective method that provides actionable data
to make informed decisions on supplier selection.

A disciplined performance management program is the best venue for
suppliers to contribute to most advantageous outcomes of expense
management and demand management strategies, as they interact with
supply chain and business unit leaders.


Program Benefits

Enables stakeholders to understand where the performance gaps lie and
supplier’s trended performance

Offers sourcing managers increased objective data during supplier
negotiations

Offers senior management an overall, objective view of best and worst
performing suppliers


Scorecard Structure

Quantitative
SLAs and KPIs
45%

Process Compliance
Strategic Partnership
Sourcing, Diversity Billing, HR, Cost Avoidance/Savings and
Product/Service Leadership
Reporting and Misc. processes
15%
10%

Qualitative
This category is uniquely designed
Customer Surveys from to constantly promote best in class
LOBs and Sourcing Mgrs behavior, competitive advantage
30% with our preferred supplier
community and continual growth in
Professional Services delivery.


Demand Management

Demand management takes supply chain
management to the next level by enabling an
automated “ecosystem” that simultaneously
maps demand forecasting against factors like
supply restrictions, customer commitments,
inventory counts, financial predictions, as well
as patterns of behavior that can affect
demand at any given time.



Demand Planning
Demand planning begins with a clear and complete business requirements definition. Good business
requirements enables the organization to develop the most appropriate sourcing strategies, select the
best suppliers and manage the category or service.
Components to consider include:
Client strategic direction and growth
Service objectives, sales growth forecasts, business efficiency goals, budgetary constraints
Impact on purchasing process, supplier management, purchase volumes, specifications
Client procurement goals and objectives
Performance objectives, customer service
New product/service introductions
Impact on new supply market requirements
Supplier diversity status and utilization
Market standing
Product differentiation
Customer Impact
Speed to market
Industry trends


Demand Modeling

Demand management is a more proactive approach than its predecessors – relying on highly
sophisticated quantitative analytics and advanced modeling techniques to preset tolerance
levels, predict and pinpoint problem areas, monitor and adjust strategies dynamically, and
achieve real-time visibility and synergy across all channels.
Some of the considerations for a comprehensive demand management solution include:

Forecast only the products and components that make sense from a profit and/or
strategic perspective
Utilize best-of-breed statistical forecasting techniques
Perform real-time data synchronization.

Employ automated, closed-loop, industry-specific workflows based on best practices


Implementation
Most companies will need to make both a
resource and financial commitment to establish
a Supplier Performance Program, however
industry trends from respected research
companies, such as Accenture, Vantage
Partners and Ernst & Young have documented
via industry surveys that the resulting cost
savings can be as great as 40%.



Implementation Model
Point of Complexity Point of
Departure Arrival

Increased Operational Increased Relationship Strategic Multi-Dimensional
Efficiency Return on Investment (ROI) Supplier Relationships

Focused/appropriate Supplier Build commodity strategies with Share business plans, and

Focused Enterprise Participation
interactions SSG, LOBs and strategic supplier financial strategies
Optimal performance metrics participation Co-investment and co-
collection, analysis and Develop and consistently apply branding
Value

behavioral modification Relationship Value Index criteria Intrinsically tied together
processes Implement risk/reward strategies Joint success goals
Performance Scorecards to build participant success
completed for only strategic factors
suppliers (critical few)

Strategic Milestones
1. Better definition of performance 1. Implement demand planning 1. Research joint venture opportunities
metrics sessions to included strategic with select suppliers to affect
2. Development of segmentation Suppliers financial and market standing
definition 2. Define two party benefit with an 2. Define opportunity for joint client
3. FTE re-allocation for greater ROI increased value based relationship approach to solutioning
on activity 3. Facilitate operational and 3. Modify sourcing processes to
4. Redirect LOB communication to stakeholder readiness activities recognize/leverage joint increased
focus on high-impact buying power
relationships


Industry Demand Trends
The savviest companies leverage insights about demand gained through disciplines
such as forecast optimization to actively influence and shape demand.
Industry trends from respected research companies, such as
"It's interesting that the more Accenture, Vantage Partners and Ernst & Young have
technically sophisticated we documented via industry surveys that the resulting cost savings
get, the more it is about can be as great as 40%.
enabling relationships. Win-
win is replacing the old idea of Even more compelling, is these same survey results have
beating up your suppliers. You confirmed that effective implementation of these programs
can't cost-cut yourself into create sustained cost savings due to the truly
prosperity.“ transformational design of well implemented supplier
management program.
Carol Park, VP of Industry Strategy
for PeopleSoft/Oracle Vantage Partners conducted a survey with 115 procurement
professionals responding when asked how much more value
Accenture’s research shows that
(in terms of cost savings, innovation, quality, etc.) is delivered
companies who transform their
by suppliers with whom a company has a strong working
businesses during a recession
relationship than by suppliers with whom the company has a
will see sustainable advantages
poor working relationship. Almost half of the respondents said
when the economy improves.
that strong working relationships deliver at least 50%
greater value than poor ones.


Key “Take-Aways”
Operational and supplier metrics is THE foundation of success for any
component of Supplier Management.
Creating a supplier performance program with an objective foundation that can
be used to not only track contracted supplier performance, but establish a venue
for suppliers to contribute and be held accountable for strategic innovation and
continuous improvement
Defining supplier segmentation criteria and effectively completing the process so
appropriate resources can be assigned to the right suppliers
Leading the overall change management to
ensure adoption and sustainability
Don’t start at the finish line, evolution of each of
the program components is integral to the
process and the success.


How can HCMWorks help?
Industry statistics support that implementing a comprehensive Supplier
Management Program, with a focused output of Expense and Demand
Management, can provide between 10 – 40% in cost savings.

HCMWorks has experienced personnel and a proven track record in:

Analysis and trend/utilization reporting
Strategy definition For More Information Contact:
Communication Strategy
Kimberly Smokey
Change Management Director, Value Creation
Implementation ksmokey@hcmworks.com
Metrics identification 866-547-1645 x 300

Category Management Outsourcing


HCMWorks’ Blueprint Series
Release 1 - Segmenting the Supply Base to
Improve Resources Allocation
Develops the ideology of a supplier management
program and more fully details supplier segmentation.
One of the most critical steps in the exercises.

Release 2 - Assessing Supplier Performance:
Supports procurement staff in developing metrics and
dashboards to critically assess supplier performance.

Release 3 - Driving Continuous Supplier
Improvement:
Supports procurement staff in developing metrics and
dashboards to critically assess supplier performance
and ensure that the measurement process is efficient,
consistent, and transparent.

Release 4 - Collaborating with Suppliers to Create
New Value:
Assists Procurement in building collaborative
partnerships with suppliers and between suppliers that
drive value and innovation.
www.hcmworks.com/news/blueprint

Hcm works -_supplier_management_programs_webinar_april_2010

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