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1. Gillet and the 7 Step Methodology
The Gillette Company launched a Strategic Sourcing Initiative to create savings to invest in company brands, fund research and development. They employed a formal 7-step strategic sourcing methodology to competive source and evaluate suppliers on cost, quality and services provided. Enabled by a strong commitment from Senior Management and cross-functional global teams, this strategy produced savings and improved the quality of the products and services procured.
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Step 1 – Develop the Category Profile. Teams are formed to develop a comprehensive understanding of their category profile. They must understand what we buy, who we buy it from, what are the product/service characteristics/specifications, what is the current cost, and who and how the spend is managed internally. They must understand market trends and economics that impact these purchases as well as our current negotiation leverage with suppliers. This comprehensive understanding of the Category also enables to break down spend into subcategories, components, services, transportation costs, administrative costs or other divisions to be either be consolidated with one supplier or divided among several suppliers. Indeed, this sourcing step facilitates procurement managers in setting supplier diversity targets and strategies.
Step 2 – Generate the Supplier Portfolio. Teams must include minority suppliers as well as non-traditional suppliers. They must look at companies that provide total outsourcing capabilities and suppliers who are best in class in specialized spend categories. Then through a rigorous process of researching suppliers, evaluating and prioritizing capabilities, the list of suppliers is converted to a manageable list. This step reduces the workload of reviewing RFPs and negotiating with suppliers later in the strategic sourcing process.
Step 3 – Develop sourcing strategies. The sourcing team develops a supplier survey for both incumbent and potential alternative suppliers. The survey helps evaluate the suppliers’ capabilities to serve as well as their costs to serve. At this time, the team will also verify spend information with the data that incumbent suppliers may have from their sales systems. Category should be assesed in a Category Position Matrix. This process aids teams in developing their sourcing strategies. Teams must evaluate the complexity of the market, the competitiveness, the ability to switch suppliers, and the number of suppliers in the market. They must also position their Category in terms of business impact, how much total spend and how does this category impact core business operations. In doing so, teams will find their category falls into one or two of the following boxes: Leverage Category, Strategic Category, Non-critical Category or Bottleneck Category. From this positioning matrix, teams can determine which of the sourcing strategies are most appropriate. Typically, teams who find themselves in the Leverage or Non-critical Categories will use the left side of the Sourcing Gemstone: Volume Concentration, Best Price Evaluation or Global Sourcing. Teams who confront more complex markets, may want to consider Product Specification Improvements, Joint Process Improvements or Relationship Restructuring strategies. In a Volume Concentration strategy, teams will often look to reduce cost by consolidating volumes from different facilities, regions, or business units. This strategy encourages suppliers to lower their costs in anticipation of greater volumes. Teams may also consider a Best Price Evaluation strategy, where they select various suppliers who have the best offering for each segment of the spend. Best Price Evaluation allows yousegment and optimize your spend.
Step 4- Select implementation path. The combination of the first three steps provides important input to developing a sourcing strategy and applying it in this step. The sourcing team has two sets of constituencies: 1) the people who use the things that are bought, and 2) the executives who manage overall costs. The people who use the spend category accept cost reductions as long as they a) start in another department; b) don’t change suppliers; and c) don’t create any complaints from the supply base that might affect any part of the relationship. For users, all change is bad. For executives, cost and service competitiveness is a key objective, but they too are users of various corporate services, so they often have a split personality between executive pursuit of cost improvement and being users who resist change. In order to mobilize users and executives to support the category sourcing strategy, it is necessary to communicate benefits and overcome potential risks.
Step 5- Negotiate and select suppliers. Preparing a request for proposal and preparing and soliciting bids. This will define the basis for competition to the prequalified suppliers. It includes product or service specifications, delivery and service requirements, evaluation criteria, pricing structure and financial terms and conditions. Also a communication plan will be executed that will attract maximum supplier interest. The RFP is then sent out to all suppliers and they are given enough time to respond completely, with follow-up messages sent to encourage supplier response and field questions. The sourcing team applies its evaluation criteria to the supplier responses. If more information beyond the RFP response is needed, it’s requested. The negotiation process is conducted first with a larger set of suppliers then narrowed to a few finalists, if it is done manually.
Step 6 – Implement agreements. Finally, the winning suppliers are notified and invited to participate in implementing recommendations. Implementation plans vary depending on the degree of supplier switches. For new suppliers, a communication plan has to be developed that manages the transition from old to new supplier at every point in the company’s process that is touched by the spend category.
Step 7- Continuos improvement. It is particularly important to measure the new supplier closely in the first several weeks of performance. Being able to demonstrate performance equal to or better than the former incumbent one will be particularly important during that sensitive time.
Gillette Company’s Strategic Sourcing Initiative has not only produced significant cost savings, but has enabled and advanced Gillette’s Supplier Diversity Initiative.
2. Nestlé and its mix of purchasing strategies
To leverage Nestlé’s purchasing volume as a strength in a business environment where the impact and importance on many spend categories is increasing, it requires planning and strategy determination, It is necessary to understand that supply markets are not and will not always be in surplus or excess, so the assurance of long term competitive supply through purchasing planning and strategy implementation is key to the realisation of Nestlé’s growth and profitability objectives.
The evaluation of different purchasing strategies can only take place once a detailed spend analysis has been completed. Strategic options must take into account: business sector objectives; total cost of ownership; supply market and its evolution; appropriate purchasing approach (e-Auctions, tenders, negotiations); value creation opportunities; emphasis on price management through competitive bidding; key stakeholder’s involvement and their support.
Rationalisation and Standardisation
This strategy is based on working with suppliers to have fewer and standardised specifications. Specification rationalisation will not only allow higher volume price leverage but also expose efficiencies throughout the supply chain, resulting in lower costs.
A key strategy in sourcing products and services is Subcontracting/Outsourcing. The responsibility of subcontracting activities rests with Technical and Production. Normally a Strategic Buyer will lead this process and manage crossfunctional teams to monitor the commercial relationship as well as to ensure optimum terms and conditions for Nestlé. Subcontractors are required to adhere to Nestlé’s Corporate Business Principles.
Purchasing must continue to work within and expand the use of cross-functional teams. Depending on the scope of the project, such teams may also involve suppliers and third-party expertise. Nestlé acknowledges and encourages the role suppliers can play in innovation, creativity and the identification of new business proposals, which will improve and add value and growth to both companies. Nestlé also considers suppliers as an important information source and relies on their objectivity and expertise. As the relationship progresses, it may well evolve into that of a preferred supplier. Purchasing wil retain the overall responsibility for the relationship and interface with suppliers.
To better manage the supplier base and reduce transactional costs, Nestlé may request suppliers to: offer their products or services via e-Requisitioning (catalogues), accept payment by P-card, deliver materials through a vendor managed inventory (VMI) or consignment stock initiative and collaborate using e-Supply Chain tools.
The extent or degree of approval/accre ditation as a supplier to Nestlé depends on the sophistication or sensitivity of the material, product or service, the supplier’s reputation and record with Nestlé, as well as their ability to offer competitive terms and conditions.
To achieve Nestlé’s objective of offering consumers high quality nutritional products, they expect suppliers to guarantee the quality of the goods they supply or the service they provide. Nestlé’s goal is to be able to rely on our suppliers’ competence and ability to implement jointly their quality programmes. Suppliers must be fully aware of Nestlé’s quality and safety standards, understand their quality policy; share their objectives and work together to achieve them. In particular they consider their supplier’s responsibility to ensure the traceability of all materials used in their own production or process.
Suppliers of raw and packaging materials must be incorporated into a formal assessment covering audits and inspectionsof their quality records. Formal audits of the supplier’s quality assurance system and technical capabilities must be carried out.
Suppliers need to be open and responsive to Nestlé’s requirements and provide all necessary information on the composition and manufacture of their products.
Nestlé encourages and promotes the use of electronic tools to optimise the value chain to lower costs, create efficiencies, drive product availability and enhance customer service. Purchasing evaluates and promotes the use of e-Procurement tools both within the company and within the supplier base.
With the trend towards closer relationship with suppliers, benchmarking becomes an essential tool for measuring performance and highlighting opportunities. The concept of benchmarking should be seen as a continuous process of evaluation to ensure that results are quantifiable and actionable; it must be supported by a direct management commitment and should be clearly defined in terms of what is to be compared.
3. Procter & Gamble sourcing networks and expressive competition
Procter & Gamble put into practice an approach to build sourcing networks, called expressive competition. It is a vision that looks past lowest-price reverse auctions and combinatorial packagebidding toward a highly expressive business relationship with suppliers. It enables suppliers to make electronicoffers that express rich forms of capabilities and efficiencies. As the buyer, P&G also uses an expressive languageto state constraints and preferences. The detailed expressions of supply and demand are brought together viaan advanced optimization engine to decide the optimal allocation of business to the suppliers. In the process, P&G’s suppliers benefited from the winwinapproach: expressive competition matched demand to the most efficient means of production- rather thansqueezing suppliers’ profit margins- and removed the exposure risks in making offers. Beyond direct monetarysavings, the benefits included the re-design of supply networks with quantitative understanding of the trade-offs.
The relationships between companies that purchase materials, goods, and services and their suppliers can be viewed as a network, because many companies both purchase and supply. Traditionally, the buyer configures the network and then asks offers from suppliers. This approach produces suboptimal results because it ignores suppliers’ alternative capabilities. With the new process this will be reversed by first collecting offers and then using optimization to configure the optimal network based on those offers. CombineNet’s (software currently used) approach is particularly relevant in transportation sourcing. By considering the most efficient routings that carriers can offer, both individually and collectively, it develops more efficient networks than the current networks. Buyers can construct supply chains in light of supplier capabilities as expressed in their offers.
Companies can now make decisions on large baskets of items to be procured, rather than in a number of submarkets, naturally improving the allocation decisions.
P&G’s use of expressive competition enables it to manage and exploit complexity and rich data to obtain the best value. In short, P&G is now faster, more rigorous, and better able to leverage its purchasing experts than it was. It obtains greater savings with every analysis than it could before it adopted this process.
4. HONDA Global and Local Sourcing
Traditionally, the standard metrics used by Japanese automakers in choosing suppliers wee quality, cost, delivery and technology. In the case of Honda, three other factors drive their spurchasing strategy.
They depend on suppliers for more than 80% of components in their cars. They procure components from an estimated 400 tier one suppliers in Japan. Globally, Honda’s supplier total number is close to 1,000 including more than 600 in North America. The main reason for this large number of North American suppliers: the distance between Honda’s main assembly plants in North America is sufficiently long to make logistics a critical cost issue for suppliers wishing to serve all six Honda plants from a single location.
Three of four Honda vehicles sold today are global models. Where possible, they prefer to use global suppliers forthese global cars.
Honda defines group suppliers as affiliated companies in which it holds a larger than 20% equity stake or which depend on them for 70% or more of their sales; or the other way around: which Honda turns to for more than 70% of purchases of a particular system or component. That is the case of Denso Corp., Toyota’s leading group supplier, is also a Honda group supplier as it manufactures an estimated 95% share of their heater requirements in Japan and 60% of air-conditioners.
There seems to be no set rule on whether Honda doubles or triples sources or what even constitutes double or triple sourcing. For most components, Honda relies on multiple suppliers. But on a model base, it tends to single source.
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Honda’s core suppliers have largely followed the OEM into North America and Asia. Keihin, Honda’s main group supplier of car electronics, has set up 16 plants outside Japan including four in the US, while Stanley Electric has lighting plants in London, OH, and Battle Creek, MI.
In general, there is a feeling that Honda depends more on non-Japanese suppliers at its overseas plant. Meanwhile, they continue to make steady progress in expanding local content at plants outside Japan.
5. Hewlett-Packard Total Cost Management Strategies
HP recognized that it could leverage advances in Total Cost Management strategies, processes and technology to improve its overall financial performance. Over a five-year period the company put together an impressive record of cost savings, transforming its Indirect Procurement function into a strategic asset for the company.
The significant cost reduction results came from an evolution and maturation of HP’s
Total Cost Management – also called Spend Management, strategies, processes, and technologies as the company itself evolved. Like many companies, HP started with the traditional spend consolidation and price negotiations strategies of the late 90s. With the Compaq merger, HP had both a challenge and opportunity to advance its Total Cost Management strategies. Going forward, the role of HP’s Indirect Procurement has evolved to a broader perspective as a strategic asset in driving down the total cost of procurement to achieve world-class cost structures.
HP knew that companies like itself were leveraging new spend management tools to drive procurement decisions and wanted to take advantage of the new selling channel to increase revenue. With a strategy of being an early supporter of the Ariba Supplier Network and working to make it easy for customers to integrate and do business with HP, it has been able to generate $1 billion in revenue, making it the largest IT supplier to Total Cost Management customers using the Ariba Supplier Network.
They realized that increased growth would be very hard if the company did not restructure to take advantage of its economy of scale. They decided that indirect procurement was a good candidate for centralization, as the existing decentralized model with fragmented local organizations provided little leverage. Indirect Procurement was given responsibility for managing nonproduction spend categories: information technology, human resources, marketing, travel, real estate and workplace solutions, finance, and labor. Its scope was to manage the strategic, tactical, and operational aspects of procurement, including global and regional sourcing, local buying and order fulfillment, and deployment of e-procurement programs.
They deployed a standardized purchasing platform, Ariba, to reduce cost of transactions and develop and implement new policies, practices, and standards. Later, they were able to identify the “low-hanging fruit” in a centralized model and redefined their procurement areas and strategies as shown in the figures below.
6. International Clothing Retailers’ main sourcing strategies
Marks and Spencer (United Kingdom)
Is one of the UK’s leading retailers of clothing, foods, homeware and financial services, serving 10 million customers a week in over 350 UK stores.
They rationalized its supplier base, with efforts for sourcing and the accelaration of the design to store lead time. M&S now manages a complex international supply chain involving 650 factories worldwide. Their priority is to maintain the quality of fabrics and clothes wherever they are manufactured. To support this objective, M&S has established quality audit teams in Morocco and Sri Lanka, and will introduce them over the coming year in China and Turkey and all their main centres of manufacturing.
Hennes and Maurizt (Sweden)
H&M is an expansive Swedish company. Over the past three years, H&M has increased the number of stores by nearly 40 per cent. H&M has 21 production offices: ten in Europe, ten in Asia and one in Africa. Around 700 people work at the production offices, by far the majority of whom are drawn from the local population. They are responsible for contracts with the approximatly 750 suppliers (primarily Bangladesh, China, Turkey) that manufacture H&M’s products. The production offices ensure that the buyer places his order with the right supplier, that the goods are produced at the right price and with good quality and controls that production takes place under good working conditions. Ensuring the safety and quality of the goods largely takes place at the production offices and is the result of extensive testing, including checking for shrinkage, twisting, colourfastness and dry rubbing. In H&M lead times vary from two to three weeks up to six months, depending on the nature of the goods. In recent years H&M has reduced the average lead time by 15-20 per cent through developments in the buying process.
The Inditex Group comprises mainly companies engaging in the manufacturing and marketing of textiles and footwear, managed on a centralised basis by applying policies and strategies at group level. A significant proportion of the production takes place in the factories belonging to Inditex, which fundamentally carry out the manufacture of the garments containing a greater element of fashion and through external suppliers. In the case of in-house production -between 40 and 50 percent of the total- Inditex directly carries out the supply of fabrics, the marking and cutting and the final finishing of the garments, subcontracting the garment-making stage to specialised companies located mainly in the north-west of the Iberian peninsula. As regards external suppliers, a high percentage of which are European, in many cases they are also supplied by Inditex with the fabric and other elements needed for the production of the garments. For Inditex, time is the main factor to be considered, above and beyond production costs. Mix of sourcing: external fabrics sourcing 60%; internal fabrics sourcing 40%; in-house manufacturing 50%; external manufacturing 50%.
Gap is a leading international specialty retailer offering clothing, accessories and personal care products. It operates with more than 4,200 stores worldwide. Gap has world headquarters in the San Francisco Bay Area, product development offices in New York City and distribution operations and offices coordinating sourcing activities around the globe. Design and merchandising teams are working more closely from the beginning of the product development cycle, resulting in a more efficient process and, over time, faster speed to market. Gap will be building more strategic relationships with suppliers, including sharing more planning and forecasting information, to further leverage sourcing capabilities. Located around the globe, employees in Gap’s sourcing and logistics group, along with buying agents, draw up production schedules and place orders with approved third-party factories in the more than 50 countries that produce goods. Third-party manufacturers ship merchandise to Gap distribution centers, which sort and redistribute it to the stores. Gap has a list of countries approved for product sourcing, located in five main areas: Africa/MiddleEast, Europe/Mediterranean, Southeast Asia, East Asia, Americas.
C&A was founded in 1841. Over 100 Stylists work together with 360 buyers. The European headoffice is located in the north of Brussels. It has 1.200 suppliers, monitored by Socam. The name Socam reflects the concept “Service Organisation for Compliance Audit Management” and its purpose is to oversee and monitor responsible business standards in merchandise buying on behalf of the C&A retail companies, which operate in Europe. An audit is performed in a total of 40 countries. Because the Far East is a significant supply market and because many of the key issues tend to be more prevalent in that part of the world, Socam also operates through a subsidiary company – Socam Services Pte. Ltd – located in Singapore. Socam has full and independent authority to monitor the standards which are defined by the C&A Code of Conduct for the Supply Merchandise.
To sum up, retailers prefer to choose the cheapest sources worldwide in order to maximize gross margin. Or, in order to decrease time to market, retailers may choose sourcing alternatives that may not bring the cost advantage of a cheaper supplier but do offer the advantage of diminishing logistics costs and lost sales.
7. IKEA selectivity strategy
Under increasing pressures to reduce costs, companies have shifted, and continue to shift, sourcing from local suppliers to low cost country-based suppliers. Furthermore, the lower prices offered by low-cost country suppliers rarely translate into significantly lower total costs of ownership. Despite the popularity of global sourcing across both service and manufacturing industries, research into global sourcing is still playing catch-up and remains poorly conceptualized, for example in comparison with research on buyer-supplier relationships or industrial networks. The trend towards global sourcing is likely to fundamentally change the dynamics of buyer-supplier relationships and networks, but little research to date has examined the implications of this trend.
Affordability through low cost is the core of the company’s business idea. For IKEA, growth is a core and explicit objective.A key component in the low cost strategy at
IKEA has been to own only a small proportion of the means of production. Therefore, the products that are sold in IKEA stores are sourced from a global network of suppliers. Well functioning and close relationships with suppliers is an important but sometimes seemingly ignored driver of the success of IKEA.
In the mid- 1990s, IKEA had more than 2,000 suppliers, but in 2009 its supply base had been reduced to less than 1,400 despite increasing sales volumes. The background to the supply base reduction during recent years is the increasing need to secure and build capacity for continued growth. In 2008, IKEA sourced furniture from 54 different countriesm through 30 purchasing offices distributed over strategic locations all over the world. In 2009, IKEA had around 1400 suppliers. Almost two-thirds of its products (64%) were sourced from European countries; the largest single supply market was China with a 22% share of the supply, and the second largest supply market was Poland with a 16% share. Coordination and communication with suppliers was channelled through trading offices situated strategically around the world. Without close collaboration with suppliers, the balancing act between stock costs and avoiding the risk of stock-outs would not be possible. In addition, IKEA seems to concentrate on as few suppliers and as few supply markets as possible. This selectivity means that IKEA is effective in balancing its market choices; concentrating its sourcing activities in certain geographic areas by committing to and investing in some markets, whilst having to decide to forego opportunities in others
For IKEA, cost reductions were the principal driver towards, initially, international purchasing and, later, global sourcing. The search for lower costs in new sourcing markets creates pressure on the supplier network of IKEA to source internationally or to develop global sourcing through world-wide coordination and integration of sourcing operations. A main reason for IKEA to preserve relationship with swedishs suppliers is to secure capacity if, or when, problems were met in the Chinese sourcing market.
The Strategic Sourcing methodology is used to identify, evaluate, select and implement sourcing alternatives for specific sourcing groups. It emphasizes the process for evaluating, selecting and aligning with suppliers to achieve improvements and support strategic objectives. It focuses on total costs and not just on the purchase price. This process enables the company to obtain a good understanding of its requirements, mapping the existing supply market and develop a plan for short andlong-term objectives.
Sourcing strategies should be reviewed and updated periodically by supply managers. Suppliers should be invited to be part of the process depending on the class of category or market dynamics. Strategic sourcing results should be tracked in terms of performance metrics and cost savings. The process should be regularly reviewed to incorporate new sourcing tools and approaches, new supplier market opportunities and developments in benchmarking and best practices.
Supply managers must collaborate internally with a multifunctional team on new supply opportunities. Collaboration demonstrates the value of supply management.
Besides the traditional competitive approach to sourcing, there are more alternatives depending on the category or business trends. Some could be, collaborating with suppliers to reduce complexity and build productivity into their process, or create joint process improvements that reduce the cost of doing business, or set up a partnership where a company invests in supplier operations to guarantee access to supply, new technology or process improvements.
Another option could be strategic alliances which decrease the total cost of ownership, increase quality, have a faster response and enable new product development with supplier involvement, among other benefits. Or even, e-procurement which can decrease the unit cost as well as the cost of transactions and processes.
Overall, not only a right sourcing strategy or model of management is enough; it is also a matter of being aligned with the company’s key obkectives and to have the right methodology, the right metrics and the right team of people.
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