Strategic Sourcing: Optimization for Tail End Spend (C-Parts)

1. C-Parts Management
Introduction and methodology
to tail end spend
Wouter Stegenga
Round Table
Amsterdam, Oktober 2011

2. What does it make you think of?
Workload to
Specialitie Price
VM(O)I Monitoring quote
Replenishmen s Kanban Sourcing
Piggy back
t Customs system Lead times process Supplier development
Theft Out of
Ordering Leverage
FiFo H2; motivate Preferred supplier
replenishment Availability
stock
Min Stock Risk suppliers? Partner
Store Stock Supply Sourcing
Long Term
room Incumbent
Alternative
s CPM Items Exotics
Reduce
/
Abandoning Indirects /specialties
Demand One offs
Behavioural Stocked items
TSM Scope
change
Non-stocked items
customer
Commodities
Headache
Internal TCO / Geography Multiple commodities
local Horizontal approach
Not Sexy Customer TAC Project/contract
Not impressive Low spend Hard overlap
Non-core
Low volume Feedback savings Soft
Low price Involvemen prices savings
Process improvements
Too many items t
> %* < € = <€ Motivation Ebit
Maverick spend Logistical improvements
Working capital
Q: where to Knowledge P2P process
focus? Authorization flow
Business logic Alternatives
Poor data Retrospective
monitoring
Poor item description
Less PO’s
Poor visibility
Less Invoices
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3. What is typical in the field of C-parts management?
How to define it anyway??
• Definition: CPM (C-Parts Mgt) refers to the tail end of all spend. It’s the low
volume, low value segment. This last portion of sourceable spend is also MRO consumables
referred to as Tail Spend Mgt (TSM).
• Scope: Scope could be limited to MRO consumables only and or numerous
Volume
Scope of CPM
(overlapping) commodities.
• Goal: to reduce the internal process costs by optimizing the supply base
# of suppliers
• Strategy: different strategies are possible and they all depend, of course, of
the known parameters, like number of items, number of distribution locations, Scaling the Pareto principle on the
volatility of products, spend, number of suppliers behind, availability of real tail itself makes us identify the
green, yellow and red.
commodity distributors, and in some cases… quality of data.
Typical spread of Number of Items Typical spread of Spend
within a CPM project within a CPM project
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4. What does the CPM situation typically looks like in an organization?
A Long Term Strategy on MRO Consumables needs to have an integrated approach,
as it will include different commodities and touching other contracts...
1) Situation 2) Complication
• Many different items are • Relatively low velocity
consumed on the factory floor • Relatively low item price
by many different
• Diversity of items
employees...
• Need to stock some of these
• As items can be urgently
needed some need to be • Many different user
stored locally... MHE consumption profiles
• The Total Acquisition Costs
can multiply the purchase
PAINTS
price...
• Overconsumption does occur,
although difficult to prove
3) Question 4) Answer
PPE
How to improve the supply of A strategy to select a preferred
C-parts, while achieving supplier for supplying 80% of
supplier reduction, process goods while implementing
optimizations and (hard) logistical concepts to optimize
savings for the organisation? the supply of consumables.
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5. How could we class different strategies and how suitable would those
strategies be if we change the parameters?
1) Reduce
4 different strategies:
• It should be part of the category mgr’s task to maintain the
portfolio and challenge the demand for exotics and duplicates.
By questioning business (processes), behaviour, demand
OUTSOURCE patterns and old machinery the (expected) demand for exotics
Integrate can be reduced or replaced by higher running alternatives.
INHOUSE
2) Piggy Back
OUTSOURCE
• By managing the portfolio the C-parts could have been
included in the contracts of higher running items. In this way
numerous suppliers take a bit of the headache away for your
TRANSACTIONAL SPEND
organisation. However, as the tail, and the insight in it, will
Leverage change often the contracts need to be flexible.
3) Leverage
• When there is a certain spend on the numerous items, taking
an integrated approach to source best would probably make
Piggy Back most sense.
4) Integrate (3rd party)
• When aiming for least PO’s, suppliers and focus on core
activities, outsourcing (BPO-P) of these procurement tasks
Reduce shall be considered.
Note
• While scoping the project always aim to make a best fit with
future demand, excluding the death items, reducing the exotic
NUMBER OF ITEMS items and understanding what has been piggy backing
already
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6. Interesting...
But besides strategies, what kind of optimizations could we aim for?
• Implement supplier reporting
on detailed consumption to • Develop relationships especially with
update Master Data on item incumbents eager to gain business in the
description. scope of C-parts
• Leverage buying power and • Have real commodity players compete
include C-parts in the strategy against specialist as to have an
like piggy backing. instrument to drive the threshold and
to make the business decision
transparent.
• Reduce demand for exotics,
implement alternatives. • Aim to largely reduce the
• Track end user consumption number of suppliers by
and automatic individual leveraging the baskets.
consumption limitations
• Reduce approval flow, • Manage life cycle and • Reducing suppliers & transition ownership
retrospective monitoring, guide internal customer (VMI, inhouse shops) towards suppliers.
monitor individual consumption, into more volatile • Implement monthly consolidated invoicing
reduce stock and stashes. items. per budget place with monitoring/reporting.
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7. ...and what could an Integrated Supply Partner realise for my organisation?
How to deliver?
Services Services
Value Products Solutions
(products) (Processes)
• eOrdering / eInvoicing
• In-depth Material Advise
• Purchase Cards • Energy Survey /
Reduce • Substitute Parts
• Blanket Orders Monitoring
Total • Supplier Reduction
• Transaction Analysis • Punch out Super Search
What value component?
Acquisition • Product Transformation
Reporting • Training
Costs • Product Adaption
• Consolidated Invoicing • Insite Services
• OE Parts Conversion
• Self Billing
• Performance • Delivery to Line
Measurement • 24/7/365 Service
Improve Supplier • Training
• Condition monitoring • Reduced Maintenance
Product Product • Consignment Stock mgt
• Technical Support • Technical Consultancy
Efficiency Portfolio • Insite Services
• Repairs • Component Kitting
• Application Advice
Reduce • Training
• Product & brand • Stock Profiling
Working • Consignment Stock mgt
rationalisation • Vendor mgt Inventory
Capital • Insite Services
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8. Okay, and how to scope and size a project? Well, first we started with an
estimation of the contribution of the three pillars to the overall savings.
Estimation of contribution of project targets
to overall savings
1) Commercial Savings
Realization of commercial savings 8%
average of €1.7M => €130k
2) Inventory Reduction
Reduce stock by 50% (€160K)
15% cost of capital => €24k ???
3) Process savings
Reduction of:
PO&Approval €???
FTE €???
Workload & replenishment €???
PO’s for non-coded items €???
closer walkways €???
etc etc. €???
Total process savings €???k
Focus on the process and commercial savings
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9. Defining different segments creates clarity for all involved and can greatly
manage the workload behind...
• Procurement should involve Material Management to define the right baskets.
• Basic rule can roughly identify the segments, for example:
 Materials with an annual spend above €3k are green items
 Materials with an annual spend below €3k and above €1k are yellow items
 Materials with an annual spend below €1k are red items
Number of Items Annual Spend
The Red segment = Headache for everybody
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10. It’s key to clearly instruct the suppliers about the tender rules, targets,
setup and supplier expectations.
The CPM tender is about developing the relationship with one or two selected suppliers. The
selection is driven by savings, capabilities, quality and the concept of service.
To manage the workload and optimize selection we had set up the following tender rules:
 Since the Green segment are the basket drivers at least 100 items (80%) has to
120 items be quoted for an acceptable bid.
€1M spend To discuss: should we reveal the total segment spend to the market?
 For the headache segment the supplier has to accept to deliver the whole
segment for the price given and with transition of the source.
1850 items With contract implementation Goodyear will hand over the sources and last price
€300k spend paid. The total spend and items for the segment are given.
To discuss: reveal prices of 100 randomly selected items for price reference?
 In the yellow segment the market decides whether it’s better to stay with our
230 items current source, to switch to the new preferred supplier or to cherry pick with an
€450k spend alternate supplier.
No spend or prices are revealed to the market.
The winner of the tender will get at least €1.3M
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11. And create a strategy to get the best bid out of the suppliers…
Cherry pick
best supplier
Negative 5% commercial
savings, because of:
Enablement of highest
process savings
Reduce the suppliers RFQ
effort and improve quotes
by focussing on service
concept
Reduce suppliers risk to
accept the red segment
At the short list there should be enough trust in
the relation to reveal current price levels of Stimulate them to ‘give
items. back’ the 5% on other
This will reduce surprises and suppliers can be segments
asked to calculate and commit on the segment Make the suppliers
savings during the tendering process. confident with the tender
Handling fee on top of
current distributors
margin!
…and implement a strong service concept
with commercial savings as well
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12. What type of logistical improvements shall we involve the local
stakeholders on?
All concepts should be established with strong local business involvement
Drawers for tools
Vending machines
Steel lockers to Shelves for fasteners
be replenished and other low cost items
Shop – In - Solution
Vertical Lift Module
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13. Best Practice: The tail end of MRO consumables...
Project outcome
• 11 commodities, supplied by 125 suppliers.
• 2200 items, 95% of materials have an annual spend of less than €3k
• Annual spend of € 1,7M, total POs: 11.000/yr
• All 11 commodities, supplied by 1 supplier; a local commodity player
• 2200 items (96%), supplied by 1 supplier…
• Suppliers reduction ~110 (~90%; 15 supplier remained)
• Annual spend of €1,5M with 1 supplier, total PO reduction: ~10.500/yr
• Savings on: Baseline Spend (inc volume discount & CP) 6%
Consignment stock 3%
Invoice reduction 2%
PO reduction (-/- 10.500 PO’s) 3%
Supplier reduction (-/- 110 suppliers) ?
FTE reduction by workload, time ?
Reduced consumption of items ?
Suppliers proposing better alternatives ?
Benefit on Non-Stocked items ?
• Supplier engineer (1FTE) for 3 months for smooth implementation
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14. Additional sources
• Webinar
• By Global eProcure (GEP)
http://www.globaleprocure.com/Webcast-Tail-SpendManagement-watch.aspx
• Sourcing managers discussion
• By LinkedIn; discussion group ‘Strategic Sourcing & Procurement’, search for ‘tailend-spend’
• http://www.linkedin.com/groups/Strategies-managing-Tailend-spend-
139021.S.56521661?view=&srchtype=discussedNews&gid=139021&item=56521661&type=member&trk=
eml-anet_dig-b_pd-ttl-cn
• White papers
• See below the only knowledgeable white paper I found on internet, again by Global eProcure (GEP).
Of an estimated € 2.000 bn in Indirect Spend in Europe each year,
a 20% tail would constitute of €400 bn of addressable tail end spend
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15. Elemica is the leading consortium in the Tire and Chemical industry
 Founded by the chemical and tire & The 32 share holders of Elemica:
rubber industries in 2000
 Greater than $70 Billion of
transactions handled annually
through Elemica Solutions
 Over 13,000 strategic sourcing
projects with yearly savings in
average of $150M
 Global presence with offices in
Atlanta, Amsterdam, Frankfurt,
London, Seoul, Shanghai,
Singapore, and Tokyo. Global
Headquarters in Exton,
Pennsylvania.
 More than 3000 companies
connected through the Elemica
Connected Solution supporting a
wide range of industries.
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16. What is the value of sourcing via Elemica?
The 3 C’s Delivered Via
COST Reduction  Dedicated Elemica staff
• Leverage aggregated spend – On site
• Increased category focus – Delivery Center Based
• New strategies  Best in class eSourcing platform
• Opportunities within the organization or in customers eSourcing
platform
• Negotiation recommendations
 Elemica logistics sourcing platform
CAPACITY Increase
• Additional resources
• More projects in same time frame
CAPABILITY Improvement
• More effective strategies
• Enhanced tools & eSourcing process
• Category experience
• Market & industry knowledge
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17. Please feel free to contact for additional information on C-Parts
Management the contacts listed below...
Go to
http://sourcelink.elemica.com/Sourcelink/Home.aspx
How optimized is your tail end spend?
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