Strategic Commodity Sourcing for Cost-Effective Supply Chains

1. Purchasing Suppliers

2. Objectives • Develop cost competitive suppliers to meet program targets • Develop relationships with suppliers • Reduce supply costs

3. Topics to be covered • Gathering commodity information • Analyse information • Draw conclusions/actions • Develop strategy for negotiations • Negotiate • Regional sourcing approval • Finalise the contract.

4. General purchasing flow chart

5. Commodity Definition A commodity is a product or raw material that can be bought and sold. In manufacturing commodity covers: • Scope of work • Available technology • Points of difference • Industry/market • Future trends.

6. Commodity information helps to: understand the product process optimise costs. Commodity information can be gathered with help from: Cost estimator Analyst Regional colleagues Supplier development Management Engineering. Commodity information

7. Commodity information Commodity information includes: • Product knowledgeOutlines market trends, available technology and understand the competition • Program trendsLooks at regional sourcing and future programs • Suppliers globallyHow do the regulations in other countries effect sourcing options?

8. Commodity information Commodity information includes: • Suppliers local and regionalWhat are the benefits of a local supply? • Regional value of purchase • Value of purchaseWhat is your influence on suppliers? • Price breakdownIncluding duty, freight and localisation plans.

9. Commodity information Commodity information includes: • Manufacturing process flow chart • Major cost drivers • Supplier quality statusSuppliers business history • Supplier capacityIs the supplier capable of producing the product numbers required?

10. Product knowledge Important factors of product knowledge include: • What is the function of the product?Speak to the engineer and supplier • How is it assembled?Plant tours to see the process and speaking to operators about issues • What regulations are in place for safety, pollution, etc?This may limit sourcing options and drive costs.

11. Product knowledge Important factors of product knowledge include: • What are the technology requirements?Is this the suppliers responsibility? • Does the product depend on global commodities?Like steel and plastic, how are they changing? • Is the technology changing quickly?What is the future of this product and does the latest technology offer cost advantages?

12. Program trends Timing schedules influence leverage and opportunities in purchasing. • New programs leverage costs for: • Potential new programs • Current model programs • Sourcing commodities.

13. Program trends • Implementing engineering changes at program launch requires: • No additional validation or tooling • Designed for manufacture • Plans for localisation implemented • Changes in technology easily introduced as features.

14. Suppliers It is important to understand the suppliers’ business and the leverage you have with them. • Local and regional suppliers • Which suppliers are available? • Are there suppliers in the region that have not been considered? • Global suppliers • Should your suppliers be aligned with more technically advanced suppliers from other regions?

15. Suppliers What are your suppliers technical associations? • What are the limitations on sourcing? • Can suppliers with their technical partners offer leverage overseas? • Do suppliers have business associates with tooling and development complete? • Can suppliers import component parts from local suppliers?

16. Suppliers What is the suppliers ownership status? • What are the sourcing limitations and technical agreements in place? • What are the technical and royalty costs involved with the product? • What is the suppliers market share? • Are they an experienced supplier? • Are there quality risks in using a competitors supplier? • Can the supplier meet the required demand?

17. Suppliers • Is there a monopoly for the market? • Is a monopoly driving up prices? • Will importing component parts be cheaper? • Are suppliers being considered for new business? • Identify new leverage and timing opportunities. • Does the supplier have partnerships with other manufacturers? • Could the other business partner help negotiate more effectively?

18. Suppliers • Are there suppliers that competitors are using that your business does not use? • Why doesn’t your business use these suppliers? • Is there a threat or opportunity? • What are the benefits of using a competitors supplier?

19. Value of purchase • How important is your business to the supplier? • What percentage of the suppliers production is supplied to your business? • Customers who spend more have more leverage with a supplier. • Which supplier has the largest market share? • A small percentage reduction in the supplier price will be a large cost reduction to your business. • A larger company may be able to reduce costs more easily.

20. Value of purchase • What percentage of a suppliers business is manufactured for your business? • Being one of many customers spreads supplier risk. • Helps the supplier gain product knowledge and experience. • A supplier that depends more on your business has more leverage for new programs.

21. Pricing Pricing information for manufacturing: • Provides management with decision-making information. • Helps to determine the break-even point. • Determines the cost of raw materials, labour and other manufacturing costs for each component and completed product. • Allows management to analyse unit production costs. • Allows selling price to be adjusted for competition. • Determines safety margins in production.

22. Price breakdown Product costing and cost drivers • Breakdown according to the request for quotation (RFQ). • Further negotiation is possible with more data. • Data analysis can identify opportunities. • Influences targets set for new programs. • Estimating effects of engineering changes.

23. Price breakdown Price breakdowns indicate: • Opportunities for cost reduction • Comparison data • Cost drivers • Impact of future engineering changes • Cost estimates developed through market testing.

24. Price breakdown Price breakdowns details include: • Imported parts • Country of origin and currency of purchase. • Look for local opportunities. • Where are suppliers buying their parts and materials? • Local purchased parts • Are there local opportunities to obtain parts and raw materials?

25. Price breakdown Price breakdowns details include: • Raw materials and cost per kilogram • Compare with other suppliers • Compare with global indices for steel, chemicals, aluminium and plastics • Imported and local • Index forecasting for future adjustments. • Fixed and variable labour costs • Comparisons and price/volume curves. • Labour minutes and rate • Profit and mark up

26. Price breakdown Price breakdowns details include: • Scrap allowance • This depends on type of commodity. Assembly or manufacturing. • Warranty allowance • Should be removed from the piece price • Tooling and other investment costs in piece price • Is there any liability or opportunity to reduce piece price when volume is achieved? • Rationalising quote in comparison to other suppliers.

27. Price breakdown Price breakdowns details include: • Freight and frequency of delivery • Duty • Look for local opportunities and countries with different trade agreements. • Packaging • Who owns and maintains the packaging? • Returnable or if disposable who pays for disposal? • Can packaging be used across other programs? • Currency rate • Understand risk and opportunity.

28. Manufacturing flow chart • Visual example

29. Manufacturing flow chart Product processes and major cost drivers: • Include costs at each step • Identify cost drivers and opportunities • Analyse value added and non-value added costs • Minimise non-value added costs

30. End