MGT 563 OPERATIONS STRATEGIES

1. MGT 563OPERATIONS STRATEGIES Dr. Aneel SALMAN Department of Management Sciences COMSATS Institute of Information Technology, Islamabad

2. Recap Lecture 23 • Why Do Organizations Most Often Do Process Improvement? • Why Should Organizations Do Process Improvement? • Process Improvement Models • ISO 9001 • CMMI (Capability Maturity Model Integrated) • MBNQA (Baldrige Award) • ISO 15504 (SPiCE)

3. Approaches • TQM • 6-Sigma • Lean • Match Process Improvement Methods to Needs • How do you decide? • Look at things like decision matrix, force field analysis, mind maps, etc.

4. Strategic sourcing – Deloitte best-practices approach

5. The Procurement Process Procurement consists of cycles of sourcing and buying transactions, which depend on each other • Money on the Table • Identify a need and negotiate and manage contracts • New or better contract creates the opportunity to save money Money in the Bank • Items are purchased based on existing contracts

6. Strategic Sourcing is a collaborative and systematic process • Reducing total cost of materials and services for an organisation while increasing quality and service • Leveraging internal expenditures while rationalising the supply base • Optimising the internal and external supply chain while managing inventory levels on a commodity by commodity basis (not “one size” strategy fits all) • Improving organisational awareness of the “Total Cost of Ownership” while reducing excessive levels of requisitioning and complexity • Building the organisation’s competitive position through continuous improvement and supplier added-value The goal is to simultaneously: 1 2 3 4 5

7. Strategic Sourcing addresses the “Total Cost” of products and services that a company procures Perceived Opportunity Purchase Price Demand Drivers Actual Opportunity Internal Policies & Procedures Specifications Procurement Practices Internal Processes Management Systems Inventory Practices Operational Practices Retirement Practices

8. Four Methods to Increase Pretax Income by 25% * Reducing total costs through more effective procurement may … +24%** 20% Reduce Procurement Costs Reduce Labor Costs Reduce Other Costs 10% • require less effort and expense than increasing sales through traditional methods • be more sustainable due to new contract agreements • be less disruptive than reducing headcount 0% Increase Sales -9% -27% -65% -10% -20% % Change Required -30% -40% -50% -60% -70% Sourcing & Procurement Value Proposition • Procurement improvements may offer a less disruptive, more effective opportunity to impact the bottom line. * Based on the following estimate of costs, as a percentage of revenue: 55% manufacturing materials & services; 18% labor; 7.5% other costs ** Assumes a 20% gross contribution margin

9. Significant opportunities have been identified in most industries • Enterprises often derive significant savings from making small improvements in supplier-facing processes and spend management. *Profitability Impact Based on 1-Percent Reduction in Expenditures Source: Gartner - Supplier Relationship Management Pushes Profitability in Dealing With Suppliers - 9/02

10. Deliverable Example Example:Commercial Printing ($7MM in Annual Savings Realized) Plant level analysis of vendor margins and volume commitments for large jobs Show tradeoffs of using unbranded paper, lower basis weights, fewer colours, etc. 27% 7% Lacking a comprehensive price tracking system, most vendors will find ways to charge more than negotiated rates Eliminate "extra" charges and cherry pick components • Strategic • Sourcing • strategic focus • microeconomiclevers 5% 5% 7% -4% 4% • Traditional • purchasing • tactical focus • traditional techniques Eliminating agency directed work, brokers, etc. 6% 3% Compliance Issues World ClassSourcingResult VolumeConsolidation "Tough"VendorNegotiations Typical PurchasingResult Eliminationof Low-ValueIntermediaries UnbundlingPrice DemandManagement VendorMarginAnalysis Strategic Sourcing delivers greater value than traditional purchasing approaches • Category Example of Strategic Sourcing vs. Traditional Purchasing Sources of Savings

11. Procurement Strategy: How procurement strategy is linked into overall corporate strategy Strategic Sourcing: The systematic method by which products and suppliers are sourced Supplier Management Information Management Strategic Sourcing Procurement Process: How the daily purchasing activities occur Supplier Management: How suppliers are managed, relationships created, and communications coordinated Procurement Strategy Organisation and HR Information Management: How IT and eProcurement tools are used to simplify and improve the overall process Organisation: How procurement is organised, resourced and trained Purchasing Process Performance Management Performance Management: How performance is measured and tracked World Class Procurement can be defined using the following seven dimensions Supporting material on the progression towards “World Class Procurement” can be supplied against each dimension

12. Cross functional teams therefore need to be employed to maximise benefit Traditional Approach Strategic Sourcing Approach Engineer CROSS-FUNCTIONALSOURCING TEAM PurchasingAgent Engineer EndUsers + + PurchasingAgent Finance Marketing Logistics Info. Mgmt. MaterialOfficer Characterised by: Characterised by: • Functional Responsibilities • No Common Focus • Lengthy Cycle Time • Joint Responsibilities • Enhanced Communications • Consistent Supplier Interface • Short Cycle Time

13. The maturity of a procurement organisation can be defined using the model below • Strategy fully supports the corporate goals and driven by corporate consensus • Managing the supply risk while leveraging the competitive strengths • Nurturing supplier relationships • Supplier base share improvement target for cost and innovation added value • Full visibility and trust across the external value chain • Procurement maintains a rationalised supplier network that delivers technology, knowledge, products or service quality superior to competitors Stage 5: Pioneering World Class Procurement • Procurement strategy aligned to corporate strategy • Suppliers selected for strategic fit and deliver continuous improvement • Data driven decision making • Full support over purchasing cycle • Risk sharing higher with the organisations co-located and jointly financed • Business planning optimises all commercial aspects, tax, investment, people Stage 4: High Performing Alliance • Formal Planning processes • Focus on Supplier Relationship Management and sharing business plans • Longer term, bigger value contracts with fewer suppliers • Collaboration on cost improvement, increased levels of risk sharing • Trained and qualified resources supporting all categories of spend • Key Performance Indicators in place. Stage 3: Advancing Level of Added Value Partnership Stage 2: Developing • - Some category strategy creation, but not company wide, and not communicated effectively • - Volume leverage through effective use of competition across categories • - Track commercial measure of performance, targets for savings • Technology enables i.e. purchase to pay cycle improvement through automation • Selected supplier base consolidation • Training and recognition of skills required Purchasing Stage 1: Reacting Buying • Needs not anticipated, data not available or not used • No organisation wide procurement strategy, large supplier base • Transactional focus • Procurement provides ad-hoc tactical support • Low skills and resource, little career planning Time Line 3-5 Years

14. C H A N G E L E A D E R S H I P Deloitte Consulting’s six-step methodology 1 2 3 4 5 6 DiagnoseOpportunity Assess Internal Supply Chain AssessSupplyMarket DevelopSourcingStrategy Implement Sourcing Strategy AssessOpportunity Institutionalise Strategy Design Program Key Change Leadership fundamentals are necessary throughout implementation of the methodology to ensure successful results • Develop vision and strategy • Redesign infrastructure • Measure performance • Enroll stakeholders • Communicate vision and strategy • Develop new values, skills, and behaviours

15. 1 2 3 4 5 6 Assess Opportunity 1 AssessOpportunity Assessing the Opportunity • Develop team charter • Identify stakeholders • Document size of buy • Document inventory • Stratify the buy • Communicate team scope Actions Outcomes • Team Charter • Current stakeholders • Overview of external spending/related costs • Identification of specific sourcing opportunities and issues • Initial Sourcing Team Communication Plan • Stakeholder buy-in to program scope and opportunities

16. 1 2 3 4 5 6 Assess Opportunity The data collected can lead the Strategic Sourcing Team to identify “Quick Hits” • Quick Hits are the “Low hanging fruit”and can provide: • Instant savings to the company • Credibility to the work of the team • Building support for further activity Early on in the process, opportunities may arise that can be acted upon by the Sourcing Team, or a separate initiative to capture cost and process savings right away.

17. 1 2 3 4 5 6 2 Assess Internal Supply Chain Assess Internal Supply Chain Assess the Internal Supply Chain • Identify demand drivers • Perform specification review • Perform specification gap analysis • Perform specification standardization review • Perform supplier specification review • Identify all related Total Cost activities • Map current process steps • Evaluate effectiveness of the current process • Determine Total Cost of Process • Benchmark Total Cost process • Identify process opportunities Actions Outcomes • List of customer expectations and requirements • List of current and future internal product and service requirements • List of successful practices being used outside the enterprise • Detailed specifications review • Initial supplier interfaces that begin supplier selection process • Detailed process map of the internal supply chain process • Total Cost analysis

18. 1 2 3 4 5 6 Assess Internal Supply Chain MANUFACTURING STOCKROOM PURCHASING SUPPLIER PAYABLES Requesting Identify In need Stock? No Ordering Place Order Yes Receive Receive order copy Receiving Receive Deliver product product Send Receive invoice invoice Disposition Use Pay product invoice Receive payment Tips for process mapping When analysing process maps, look for rework, redundant activities, excessive work process handoffs and corrective actions as areas for improvement. Mapping Tips: • Always map process as it actually occurs, not as it should occur • Utilise direct observation when possible • There may be several maps to account for variations by location, commodity, etc. • You will often encounter subprocesses within larger processes • The flowchart should be understandable to non-users of the process. Note: Actual process maps are completed in greater detail.

19. 1 2 3 4 5 6 3 Assess Supply Market AssessSupply Market Step 3 - Assess the Supply Markets Actions Outcomes • Identify potential sources of supply • Evaluate industry(ies) • Identify viable sources of supply • Perform supplier assessments • Perform supplier comparisons • Identify supplier opportunities • List of successful procurement practices being used outside the enterprise • List of viable suppliers • Initial supplier assessment and comparative analysis • List best performing suppliers

20. Supplier Value Chain analysis Useful for understanding supplier position and potential savings levels Sources of data include suppliers, public financial data, industry reports, etc. Five forces model Useful for understanding relative bargaining power in a category Who sets the price – you or your supplier? Some key tools for supplier market evaluation Potential Entrants SupplierValue Chain Analysis: Example: Distributor Cost Breakdown Gross Margin £0.14 Industry Competitiveness Intensity of Rivalry Among Existing Firms Sales and Marketing £0.19 Suppliers Customers Purchase Price £1.22 £0 £0.50 £1.00 £1.50 Overhead £0.09 Substitutes Retail Price £1.64

21. 4 1 2 3 4 5 6 Developing Sourcing Strategy Developing Sourcing Strategy Step 4 - Develop Sourcing Strategy Actions Outcomes • Reconfirm scope • Determine desired outcomes • Compile opportunities • Brainstorm process enhancement and supply strategies • Test process strategies and solutions • Test supply strategies and solutions • Draft an action plan • Communicate strategies • Finalised scope of work statement • Enhanced internal supply chain process strategy • Sourcing strategy to meet objectives and desired outcomes • Understanding of how internal stakeholders will be impacted • Management approval of process enhancement and supply strategies

22. 1 2 3 4 5 6 Developing Sourcing Strategy Spectrum of Procurement Strategies Ease of Implementation More difficult Less difficult Volume Concentration Demand Management Actions Best Price Evaluation Global Sourcing Product Specification Improvement Joint Process Improvement Relationship Restructuring Consolidation of purchased volume to increase negotiation leverage (materials and business units) Policy changes that reduce demand for the product/service or substitute lower price product/service Disciplined process for aggressively renegotiating all or selected supplier prices, contracts and agreements based on competitive bidding or other techniques Expansion of supplier base on a broader, sometimes international scale Changing the relative market complexity of an item through standardiza-tion, substitution or value engineering Use of supplier/ customer teams to reengineer key supplier processes, joint processes and the supply chain for mutual advantage and cost reduction Structuring of long-term supplier/ customer partnerships or alliances to achieve integrated new approaches to the business

23. Methods for defining the sourcing strategy This sourcing strategy defines both the commercial relationships with the supply base and the internal supply management processes Sourcing Strategy Supplier strategy Commercial relationship Supply management process Internal procedures Leverage Partner Centralise execution Cross Functional High High Buy Market Manage risk De- centralise ordering Simplify Strategic importance Strategic importance Low Low Low High Low High Difficulty of obtaining supply Complexity of the buy

24. 5 1 2 3 4 5 6 Implement Sourcing Strategy Implement Sourcing Strategy Step 5 - Implement Sourcing Strategy Actions Outcomes • Develop supplier solicitation strategy • Implement supplier solicitation strategy • Conduct supplier negotiation • Develop process enhancement strategy • Obtain final approvals • Award contract • Selection criteria and weightings for supplier selection • Request for Proposal (RFP) to suppliers • Short list of suppliers • Comprehensive evaluation of short-listed suppliers • Performance measure categories for supplier performance analysis • Final selection of supplier(s) • Finalised Standard Agreement, with negotiated pricing and terms • Communication to all affected stakeholders

25. 1 2 3 4 5 6 Implement Sourcing Strategy A list of key criteria and associated weights is required to assess the potential suppliers The negotiating strategy will help form a list of key criteria and associated weights to assess the potential suppliers Topics Addressed Weighting Factor Issues Addressed Quality 35% • 3rd party certification • Evaluation of preventative maint. • Evaluation of quality assurance procedures Service 20% • Inventory management • Electronic interface capabilities • Value-added services Delivery 15% • Order cycle-time • Rush order procedures Cost 30% • Price • Discounts Total 100%

26. 1 2 3 4 5 6 Implement Sourcing Strategy Based on market analysis and the supplier information collected, develop negotiation tactics for each supplier • Strategic Items • Collaboration/partnership • Best practice • Exploit mutual dependency • Bottleneck Items • Strategic inventory • Focused management • Move to strategic • Collaborate 1 2 3 4 5 6 . . 20 Number of Suppliers • Non-Critical Items • Standard products/commodities • Monitor order volumes • Spot market • Leverage Items • Establish vendor rating criteria • Competitive bidding 0 5 10 50 % of Supplier’s Turnover

27. 6 1 2 3 4 5 6 Institutionalize Sourcing Strategy Institutionalise Sourcing Strategy Step 6 - Institutionalise Sourcing Strategy Actions Outcomes • Transition to new process • Develop supplier relationships • Implement operational changes • Establish joint supplier/Enterprise process improvement team • Monitor and report savings • Monitor and report performance • Implementation of new processes • Transition to the new supplier(s) • New supplier relationship(s) focused on jointly achieving Total Quality • Jointly developed process improvement and ongoing quality supplier relations • Measures for internal compliance and track benefits

28. Sample Stratification Criteria Two key criteria determine a Supplier’s position within the Stratification: Market Complexity and Strategic Importance. Stratification Framework Level 1 Core Partner Market Complexity (product/service uniqueness, inflexibility to switch suppliers) Strategic Partner Level 2 Level 3 Supplier Strategic Importanceof Product or Service

29. Importance of Team Work

30. Wrap-up 1. Think strategically 2. Measure Total Cost 3. Work as a Team