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Strategic Sourcing. What is Strategic Sourcing. Applicability of Strategic sourcing. Process. Sourcing lever - Examples. Leverage volume Buying solutions not products Third party solution provider Direct purchase from manufacturer Optimization of specifications Long term contracts
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Sourcing lever - Examples • Leverage volume • Buying solutions not products • Third party solution provider • Direct purchase from manufacturer • Optimization of specifications • Long term contracts • Supplier managed inventory • Total cost of ownership • Life cycle costing • Conversion route • Joint improvement initiatives • Reverse auctions • Free delivery at site • Leveraging payment terms • Diversifying risks
Supplier Value Management Approach (SVM) – Focus Area • Value-creating partnerships (win-win) between customer & vendor • Optimizing costs and resources in the entire value chain • Understand each others requirement & eliminate inefficiency, assumptions in the chain & align the supplier to the end customer’s requirement • Establish communication channels at all levels to leverage knowledge and resources for mutual benefit • Create a platform for continuous improvement • Thorough understanding of entire supply chain can be developed on: • Cost base of Supplier • Usage Cost: Product specification, design, new product development, cycle time reduction etc. • Impact of technology • Quality • Bottlenecks • Future requirements of Buyer & Supplier • Benefits: • Overall cost base reduction at Buyer and Suppliers end • Better understanding of each other requirements • A joint working atmosphere
Case Study – Hired Material Handling Equipments • Background: • Spend: Rs. 400 – 500 Lacs • GHCL - SA plant handles approx. 10000 MT of bulk material – daily. Material handling includes • Feeding of RM in SA plant and its internal movement • Proper storage of excess material to ensure optimum utilization of available storage space • Loading of vehicles to shift bulk material like ash, undersize Limestone, etc. out of plant • Part of bulk material is handled using mechanized system (Truck tipplers, conveyors, etc.) and part is handled using hired equipments viz. loader, dumper, TC, dozer, excavator, etc. • Challenges: • In spite of having full fledged mechanized system to cater for 100% RM requirement of plant, Sizable amount of material was handled using hired equipments due to variety of reasons viz. • Irregular receipt of RM during the year as well as during the day • Requirement to store large volume of RM for usage during monsoons, festival, etc. due to scarce supply • Spend followed uniformly upward trend due to dependence on diesel prices, manpower cost equipment capital and maintenance cost
Case Study – Hired Material Handling Equipments • Methodology adopted: • Formulation of cross functional team • Graphical depiction of MH activity: Multiple re-handling observed due to lack of online storage facilities, scope for improvement in mechanization, scope for contract re-engineering type which was hourly based, etc. • External analysis – Study of similar industries practices: Each unit scrutinized had their unique contracts for handling bulk material. As is implementation in our system was not feasible • Hypothesis compiled for further consideration, which included – • Conversion of hourly based payment contracts to MT based contracts, • clubbing of activities • contract consolidation to improve equipment utilization, etc. • create online storage facility
Case Study – Hired Material Handling Equipments • Conclusion / Outcome: • Indirect tonnage measuring method adopted for tonnage based contract. Approx. 87% of handling activities are being carried out on tonnage basis which was about 43% earlier. Benefits - reduction in requirement of continuous supervision, simplified operations and increased accountability of contractor • Activities were consolidated in Sizer operation for better equipment utilization and hence derive cost benefits • Contracts renegotiated based on alternate quotations received from experienced outside contractors. Though original contractors were not changed, to avoid local disturbance • Proposals for creation of Online storage facilities (storage on top of conveying system) are generated & may be implemented post budgetary approvals
Case study - Paints • Total painting area - 8.50 Lacs Sq. M (approx) • Current Scenario: • PU base system with Guarantee: 1.5 yrs (max) based on corrosion audit conducted in yr 2003-04 by CECRI • 25 paint schemes were applicable across the plant • Non-availability of Quality Vendors for polyurethane based paint application • Hypothesis: • Adopting Epoxy based paint system instead of Polyurethane • Reducing no of schemes of paint application across the Plant • Reduction of Life Cycle cost by increasing guarantee period • Synopsis: • Corrosion Audit was conducted AkzoNobel & report submitted with latest painting solutions • Trial order to M/s Akzo Nobel for highly corrosive area with Epoxy base system with guarantee of 5 yrs • Division total plant area in two parts based on corrosiveness, • Highly corrosive ( 1.5 L Sq. M area) • Moderate corrosive (7 L Sq. M area) • Corrosion audit conducted by renowned vendors to design their own painting schemes with min. 3/5 yrs guaranteed life • 8 schemes were finalized post technical evaluation
Case study - Paints • M/s Kansai Nerolac was finalized for long term contract based on life cycle cost instead of per liter cost of paint • Benefits: • Total Ownership of Paint Application was transferred to Vendor • Reduction in Inventory level • Savings in Application Cost & Time
Case Study – Bearings • Scenario: • Annual Spend: Rs 110 lacs(approx) • No of Vendors: 4 Nos (FAG,SKF, NTN, Timken) • Annual Rate Contract with Authorised Dealer of FAG & SKF • Challenges: • Transaction with high number of Vendors • High Lead time in procurement • Price List based items (Less Discount was offered by Authorised Dealers) • Higher Inventory level was maintained for satisfying frequent Maintenance requirement • Remedial Actions Taken • Direct OEMs (SKF& FAG) invited to study our consumption pattern and submit offer for long term contract. • Contract was finalized with SKF, with VMI at plant • Benefits • Discount Structure was revised from 25% to 27% on list price with 5% TOD • VMI was introduced without any additional cost. • Better Discount and T&Cs were extended to other units of GHCL (Vapi & Madurai)
Challenges • Gathering information during External Analysis – due to unwillingness of Industry to share sourcing information • Inherent resistance to change • Implementing changes that are locally sensitive • Cost & time involved in experimentation • Confidence building exercise within team • Clash of priorities – Development exercise vs Production
Highlights of past few years • Average project spend per annum Rs. 5000 Lacs • Standardised project cost estimation format to incorporate indirect expenses for accurate project budgeting • Continuous review of project progress, project cost and taking corrective measures to minimise delays / cost overruns • Established practice of finalising high value equipments in competitive environment, as against practice of dealing with single vendors. Hence deriving sizable cost benefits • Introduction of alternate vendors has resulted in savings • Establishing practice of deriving breakdown costing in case of technical preference for procurement of technological equipments from single vendors • Incorporation of Project MIS report in SAP with budget cap • Usage of SHIS for duty benefits
