5. Procurement Optimization
Objective:
Procurement activities are leveraged across business units and locations globally, assuring best terms, pricing, supply and delivery. All buyers have direct access to contract prices, best actual prices, and supplier information to facilitate day-to-day buying decisions. Internal and external information is leveraged with proactive buying campaigns, evaluating additional vendors, finding less expensive sources, and enticing new suppliers where competition is lacking. Unauthorized buying (“off-PO”) is monitored, managed, and minimized.
Background:
Large manufacturers with multiple factories, often in multiple countries, typically do not have integrated, detailed purchasing information. Thus, buyers do not have access to the best prices globally for specific raw material or indirect supply requirements. They are left to do their best with local information or corporate information lacking adequate detail. Many indirect materials and services are purchased with informal “off-PO” processes and are not well monitored or controlled.
New Process:
Major procurement savings opportunities come from integration of global vendor, contract, and purchase order data from all business units and sites into an EDW. Vendor names, addresses, and identification from source systems may need to be standardized and classified because vendors may operate under different names in different countries. Finding new suppliers, particularly in emerging source areas, is simplified with global business site and industry classification data from external information sources such as Dun & Bradstreet, Hoover’s, Thomson, One Source, etc.
Integrated procurement order and invoice data includes vendor contracts, purchase orders, delivery data, quality data, invoice quantities, prices, credits, debits, rebates, allowances, returns, and payment information for real net price visibility. Invoiced transportation costs should be included and matched to POs for freight allocation. Standard freight costs associated with specific source-to-destination route combinations allow analysis of delivered cost options.
Material item and services transactional data from source systems needs to be supplemented with standard material and services identification and classification to enable price comparisons of like materials and to identify possible substitutions. External data services are available to help automate identification and classification. Use of the UNSPSC (United Nations Standard Product and Services Code managed by the GS1 Global Standards organization) is recommended.
Analysis of purchase prices for common materials and services identifies opportunities to lower prices by negotiation and to leverage larger volumes. In some cases, identical products are purchased in different packaging or shipping configurations (such as bulk versus drums for liquids). It is important to see the combined purchases of all configurations, as well as each configuration, because they may or may not be substitutable. Assure use of common measuring units for analysis because different manufacturing sites may be ordering in different units.
Provide department summary and exception reporting for “off-PO” purchasing by department or area of responsibility to instill discipline and control these expenses.
Provide standard analyses such as:
- Buyer query to find lowest cost source
- Year-over-year unit cost comparisons for materials and services
- Global comparisons of material and service costs
- Calculate savings opportunity if everyone buys at lowest price
- Value/cost comparisons using quality information
Other analyses such as:
- Spending trend by business unit, cost center, and buyer
- Vendors not meeting on-time delivery and quality requirements
- Exception report of significant price change versus previous PO
- Exception report of purchases differing from contract prices
- Compare vendor price, service, and quality for materials purchased from multiple vendors.
Leadership:
Corporate executives establish global procurement policies and monitor results. They focus on spending, with executive goals, report cards, and incentives. Metrics and goals are established for every manager of people who buy. They assure that all buyers have, and use, query capability to find the best sources and price.
Results:
Conservatively, if procurement accounts for 25% of revenue and 10% savings are achieved on 20% of those purchases, then profit is increased by .5% of revenue. (Actual best-practice procurement savings for a global manufacturer with an EDW exceeds 1% of revenue annually.)
6. Supply Chain Optimization
Objective:
Integration of all supply chain activities and costs in the EDW enables analysis and simulation to optimize supply chain efficiency. Plants and distribution centers are optimally located. Products and geographic service areas are assigned to plants and distribution centers (DCs) to minimize global supply chain costs and meet service requirements. Day-to-day supply chain decisions are made with visibility of total cost and service impacts.
Background:
Because strategic supply chain optimization involves complex analysis using sophisticated modeling tools and lots of data, it is typically difficult to accomplish because the required data is not available. Decisions are often made intuitively like “we need DCs close to customers to meet service requirements” when, in reality, too many DCs results in worse service because full product lines are not being stocked at small DCs with inadequate demand. When modeling experts are employed, they expend lots of time and money getting data and often must make do without complete information.
New Process:
With an EDW, supply chain modeling and optimization becomes practical. With analysis of internal and external operations throughout the entire supply chain, substantial supply chain efficiencies are achieved. Vertical integration of operations and planning among trading partners becomes more feasible. CPFR (collaborative planning, forecasting and replenishment) and VMI (vendor managed inventory) can be implemented to improve supply chain management. DCs are consolidated when appropriate and located optimally, with service areas optimized. Products are manufactured in optimal factory locations for global supply chain efficiency.
Transportation costs can often be reduced by analyzing inbound and outbound shipments, and establishing backhauls to obtain substantial cost reductions.
Leadership:
A corporate supply chain executive is responsible for enterprise supply chain optimization. Modeling tools and experts are used to identify opportunities to improve factory and DC locations, sourcing changes, product lines and distribution areas served by each DC, and channel partner changes to improve end-to-end supply chain efficiency. Transportation costs are minimized and customer service is optimized.
Results:
Conservatively, if total supply chain transportation costs represent 2% of revenue and are reduced by 5%, then profitability is increased by .1% of revenue. In many cases, the opportunity is much larger.
Part 6 of this series will explore EDW-enabled business improvement opportunities in information technology.
Allen Messerli - Allen Messerli, President of Messerli Enterprise Systems LLC, specializes in enterprise data warehouse consulting, and has provided vision, direction and leadership for 400 major enterprises globally. Previously he had more than thirty years experience in a wide variety of positions at 3M, with an extensive record of successfully managing large-scale, innovative information technology solutions across supply chain, manufacturing, sales and marketing functions. 3M is a diverse global manufacturing company, with 40 business units operating in all countries and selling 500,000 products through most market channels. Al conceived, justified, architected, and directed implementation of 3M’s Global Enterprise Data Warehouse, which contributed more than $1 billion net business benefits with a very large ROI, and is now a global best practice enterprise data warehouse. He has extensive leadership experience in industry, national, and international logistics and electronic commerce organizations, and was a pioneer in electronic business and data warehousing, often speaking on these subjects around the world.
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