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Strategic Procurement
How are we going to Sail together ?

Heuristics
Background

Changing paradigms…

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International Business hubs

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Shifting paradigm of low cost source

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Strategic

Procurement Is it

an art or

science ?
5

If you are a Strategic Buyer of a

FMCG brand… What would be your

prime objectives ??

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Lead time Service level

Management

Variance Cost
Reduction Minimization

Bottle Neck Inventory

management Management

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Porter’s value
chain
firm infrastructure
human resource M
n ar
management technology gi
Support development
activitie procurement
s inboun operations outbound servic
d marketing

i
e

n arg
logistic logistics

M
s
& sales

Primary
activities

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Before
that… Lets
dwell into

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nt Phases

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Why there is a
“Strategic” prefix in
procurement?

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Procurement Phases

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Some decisions…

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Proportion of value from supply chain is

approximately 20-80 per cent
Price
Supplier search &
Selection costs This number is increasing due to
outsourcing
Supplier negotiation
costs
Transportation costs
Supplier monitoring Price is only the top of the iceberg: hidden
& development costs are more important
costs

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“Strategic”-makes “magic”
• Specific amount of cost saving
• An improvement in customer support through reduced
lead times from suppliers and better on-time
delivery performance
• Development of new supplier alliances and
partnerships
• Reduction of inventory levels through, for example,
consignment
• Development of new demand management planning
tools and models

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What & Why – Strategic

Procurement?
• Question of local, regional or global sourcing

• Structural decision: how many suppliers should be

used for the purchase of the same, or very similar,
items / categories?

• Differentiating in relationships for different

items/categories;

• Differentiating in contracts type & duration

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What? C&Q? How much?

Strategi Who? When? What price?

c
objectiv
Where? How? Why?
es

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Primary/
Secondary
Responsibilities

Core & Non-

core
activities

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Hidden & Important

tasks

Spend Identify Improve Design

Spend pattern analysis Rationalize (Supplier Improve competition Design internal processes
performance).

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Points to remember…

How do I
What are my Which services do distinguish myself
core I offer? from my
competencies? competitors?

What
What are the What is the opportunities,
needs of my focus of the potentials, and
stakeholders? added value? threats exist?

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Procurement = not only buying

(video)

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•Procurement - video

does not sit on cost minimization

• value addition
• Risk management

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Procurement Services

Internal and external customers

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Other types…

•Strategic

Procurement Plus

•Operational
Procurement
•Project Procurement
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When will you become the full

fledged procurement
Professional ??

????
Transaction

Documentation Distribution
channel channel

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Traditional one
Collaborative Approach
Suppliers Multiple sources Few preferred suppliers

Cost sharing Buyer takes all cost savings Minimizing Win-Lose proposition
Supplier hides it

Joint improvement efforts Little or more Improved by mutual dependence

Dispute resolution Buyer decides unilaterally Existence of conflict resolution

mechanisms

Communication No two way exchange of information Open and complete exchange of

information

Market place adjustments Buyer determines wrt to changing Work together

conditions

Quality Buyer inspects at receipt Designed into the product

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Key Take Aways

Change Change the way the company thinks about Procurement

Spend 25 percent of your time thinking about suppliers and procurement (Meet
Spend
CEOs/CPOs of your partners)

Challenge Challenge your suppliers (prepare them for 360 degree program)

Consider Consider CPO with real powers (not delegation) & bring CPO to your inner circle

Drive Drive your CPO for sustainable (profitable) growth not only on cost savings.

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Procurement challenges
• Increasing cost pressure
• Support for internal productivity progress
• Shorter life cycles
• Managing the internal and external customers
• Technical innovation
• Changes in the markets
• Decreasing own added value
• Management of risks
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Strategic Sourcing Process

Supplier
Development

Supplier
Selection and
Evaluation

Supplier
Management

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The Process
Supplier selection is an eight-step process:

Step 1: Recognize that a need exists to select a supplier – How do you recognize that?
Step 2: Identify key purchasing requirements – How?
Step 3: Determine appropriate purchasing strategy - What are those?
Step 4: Identify potential supply sources
Step 5: Limit suppliers in the selection pool
Step 6: Determine the method of supplier
evaluation
Step 7: Make supplier selection decision
Step 8: Negotiate and execute agreement

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Identification of Potential
Sources
Universal List of List of Short-list Selected
List of Feasible Qualified of Suppliers
Suppliers Suppliers Suppliers Suppliers

Collect
additional
1st level screening data?
• Basic Requirements
• Supplier size 2nd level evaluation
• Ability to develop custom
solutions
• Selection criteria
developed with the
SUPPLIER
• Geographical coverage
• Technological capability
category strategy Filter
as
• Quality product/service a guiding principle Process
offering
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Step 1:

Recognize that a need exists to evaluate and select a

supplier

• How or when do we know a need exists to evaluate

and select a supplier?

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Recognition of Needs/ Description

of Need

What are the possibilities to meet the demand ? In-sourcing / Transfer of Stock

If the recognition is not proper … What kind of impact, it would create ?

Owner of the process ??

How do you manage the recognition as a supply manager ?

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Sources of specifications

Commercial Performance
Brand Names Blue prints
standards specifications

Buyer’s &
Material Combined
Samples  Public
Specifications standards specifications

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Specifications could
be….

CONFORMANCE PERFORMANCE
SPECIFICATION SPECIFICATION

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Description of the need

• If the accurate specification of the requirement is not there – How does it impact ?
• Why have supply managers always been criticized?
• A Honda, Gas Electric Hybrid, 5 Speed 4-seater car
• Requisitions:
• Standard Requisition
• Travelling (kanban) and
• Bill of Materials
• The flow of requisition – needs to be established
• Who has the power of requisition? / How it should be ordered?
• Early supply and Supplier Involvement

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Step 2: Identify key purchasing and sourcing requirements

• What are our internal requirements in quality? Cycle time? Cost?

Technology? Responsiveness? Delivery? Design support? Other?

• How do we know or determine these internal requirements?

• What are the other factors that determine this?

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Bill of
Material Table
100 Level 0
Single-level bill
Hardware
Base Top
Components kit Level 1
300 025
822

Table
100 Level 0
Multilevel bill
Hardware
Base Top
kit Level 1
300 025
822

Legs Leg bolts Frame Boards Glue Level 2

306 326 357 031 075

Wooden Wooden
Level 3
sides ends
311 433
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Problem
Given the following parents and components, construct a product tree.
Figures in brackets show the quantities per item.

Parent A B C E
Component B (2) E (2) G (2) G (4)
C (4) F (1) F (3)
D (3) H (2)

What number of Gs are needed?

Which components are purchased?

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Problem Solution
Number of Gs needed: 24
Purchased components: G, F, H, D

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Step 3: Determine purchasing or sourcing strategy

• No single strategy will satisfy the requirements of every purchase

requirement

• Firms often develop strategies around commodities using a portfolio

analysis approach

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Step 3: Comparing Structural Sourcing Strategies

Multi- Parallel Single Network sourcing Triadic
sourcing
sourcing sourcing sourcing
Illustration

Features.  Competition  Focal firm–  Collaboration  Focal firm–  Collaboration

between supplier between focal supplier between focal
suppliers collaboration firm and collaboration firm and
 Spreading and supplier– supplier  Supplier– suppliers
risk supplier  Accepting supplier  Competition &
competition high facilitated
 Reducing
 Accepting degree collaboration &
dependency some of competition collaboration
 Delegated between
dependency dependency tiered suppliers
and risk  Supplier supply
Discussion: but  Reducing
structure
WHEN: do you prefer backup partnerships
supplier  Parallel/dual dependency
network ing; WHEN sourcing
sourc parallel at
? hand to
sourcing Page 96-101 [sole sourcing: spread
Procu from risk
ent -
rem m
C op y
o n opolist]
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Step 4: identify the sources

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Central
Information Accounts Purchasing Corporate
Systems Payable Files Mailing Lists Files Knowledge

Library Search
Competitor’s Based on SIC
Past Suppliers Internet Suppliers Trade Journals Codes

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After that What ?

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How do we bring the

(negotiating) parties onto the
table ?

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Negotiation trait

(Conscientious, Outgoing, Willing to win, Solution-

focused, Open-minded, Agreeable and Personal calm) .
COW
SOAP

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Some tips…
• Establish your reputation first
• Understand/Research on participants

position/Budget and interests

• Never make the first offer
• Always focus on value addition
• Listen- Listen – Listen
• Open ended questions
• Be positive

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Zone of Mutual • An imperative tool. (BATNA, LDO, MDO)

Acceptance
(ZoMA)

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REDSHEET (STEP)
Approach

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Cultural issues

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Under what circumstances, would you feel the role of the following :
Extending the deadline
Engaging in a personal for a competitive bid Giving the right of first P card arrangements
Accepting the gifts Accepting the friendship with a refusal to the current (decentralized
from a supplier invitation for dinner to one of your
supplier’s sales rep suppliers supplier purchases) ?

Do you feel the influence of location in the negotiation exercise ?

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Good Guy/Bad Guy Expressing fear of

Playing Dump
tactic loss of Job

Negotiati No /Limited
on authority
Incentives Nibbling & Bogey

Tactics 
Let us split the
Take it or leave it Last and final offer difference
(very risky) (softer one) • ( sharing the difference
amount)

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Negotiations Embedded into portfolio

analysis… ottleneck

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What are the factors that

may weaken your
negotiating position (from
buyer’s view) ?

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1. Sourcing process has multiple steps (8 step

process)
2. DuPont chart indicates the contribution of
purchasing to the bottom-line result
Summary 3. Pareto helps to focus on cost-drivers

Strategic 4. Commodity analysis/Category management

supports your supply-base management

Toolset 5. Kraljic matrix helps to apply the best strategic

approach towards suppliers
6. Negotiation has a major role in the
Procurement / tactics

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• When do you do ?
• How do you do ? - On what parameters
• Turn key arrangements
• Role and types of contracts
• Careful attention to personal issues

Outsourci When outsourcing an activity that was conducted in-

house to another firm what kinds of resistance would
ng you be likely to meet ?

What would be the consequences of organizing for

these kind of operations ? What would you consider
to be the role of a buyer / Business manager ?

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What Is the Spend Analysis Process?

Benefits of Spend Analysis

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• Reveals Opportunities to Save Money

• Simplifies Forecasting and Building Budgets

• identifies Underperforming Suppliers

• Streamlines Internal Procedures

• Supports Benchmarking

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• Maverick spending

• Duplicate payments

• Late fees

• Unnecessary department spending

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How to conduct Spend

analysis ?

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A critical first step is to correctly define the market

segments for the category scope
Characteristics of Suppliers that Key Question: Where does
“Fit” within a Market Segment the team have
 Similar production  Similar At what level do we define the maximum
process market? bargaining
Technology power?
 Similar supplier
sources  Similar
Office
Supply chain Supplies
 Similar material
content/ complexity  Similar
Bargaining Power

Internal Writing
value chain Paper Utensils
 specifications
Similar product  Similar
Increasing

Customers and
markets Copy Legal
Paper Pads Pens Pencils

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Contract
Managem
ent
Best Practices of Managing
the Performance of Suppliers

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RFQ
• A standard enquiry or RFQ form will typically set out
the details of the requirement:
• The contact details of the purchaser
• A reference number to use in reply,
and date by which to reply
• The quantity and description of goods or services
required
• The required place and date of delivery
• The buyer’s standard (and any special) terms and
conditions of purchase Terms of
payment

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Invitation to bid or tender (ITB or ITT)

A full competitive bidding or tendering process may typically be

required for contracts over a certain value threshold to ensure the
competitiveness of supply.

• Open tendering
• Selective tendering
• Restricted open tenders

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• Preparation of detailed
specifications and draft contract documents, setting out the requirements in detail: this is
important in providing tender information to potential bidders so that bids can be [al accurately
cost and b) directly compared. Once the tender procedure is in motion, there is
• Little room for re-negotiation
and adjustment of specifications. Attention must be given to the accurate specification of the
requirement, including non-price criteria (e.g. quality measures or sustainability standards), so
that the buyer’s task later be simply to (a) check that tenders received to comply with the
requirements and b ) choose the lowest price (or best value) bid.
• Advertisement of the
requirement, tender procedures to be followed, and timetables for expression of interest
(in a selective tender) or submission of bids (in an open tender)
• Sending out of pre-qualification questionnaires (in a selective tender) in response to
expressions
• of interest, with timescales
for these to be returned. Follow-up information or clarification may be sought during the pre-
qualification or appraisal process.
• Issue of invitation to
tender (ITT) and tender documentation to those responding to the advertisement or
invitation to tender within the prescribed time frame. Tender documents would normally
include an invitation to tender (ITT) and instructions to tenderers; a pricing document
and/or form of tender; the specification: criteria for contract award; contract conditions or
conditions of purchase; deadlines for submission; and a pre-addressed tender return label.
• Tender documents
should be issued to each potential supplier in identical terms and by the same date.

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The general principle is that the successful tender will have

the lowest price or the ‘most economically advantageous
tender’ (defined based on the specified value criteria).

However?

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Specification
As part of the procurement cycle, the purpose and value addition of an effective specification is to:

• Define the requirement- encouraging all relevant stakeholders (including the procurers and users
of the supplied items) to consider what they need and whether this is the only, most
cost- effective, or most value-adding solution
• Communicate the requirement clearly to suppliers so they can plan to conform – and perhaps
also use their expertise to develop innovative or lower-cost solutions to the
requirement.
• Minimise risk and cost associated with doubt, ambiguity, misunderstanding, or dispute as to
requirements and what constitutes satisfactory quality and fitness for purpose.
• Provide a means of evaluating the quality or conformance of the goods or services supplied for
acceptance (if conforming to specification) or rejection (if non-conforming), to ensure
that 'right quality is achieved and to minimize failure costs.

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Types of
specifications

CONFORMANCE PERFORMANCE
SPECIFICATION SPECIFICATION

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The conflicting interests…

• Is it a fixed-price contract, or has a price escalation clause been inserted?

• If the supplier delivers late, will the buyer be entitled to end the agreement?
• Who pays the costs of carriage?
• Who bears the risk of accidental loss or damage in transit?
• If the supplier delivers goods that do not match the specifications or which are not satisfactory
• Quality: will the buyer be able to reject them and claim damages, or has the supplier tried to exclude or
limit his liability for such a breach of contract?

Battle of the forms. Whose terms of business will end up governing the contract?

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The general principle (the 'last document rule') is that the last set of
terms and conditions constitute the final counter-offer:

the party who fires the last shot wins. Usually, the seller is best placed
to deliver the goods with a delivery note repeating its standard terms.

Suppose the buyer’s goods inwards department has signed the delivery
note or accepted and started to use the goods. In that case, the courts
will likely judge that the final counter-offer was accepted and the
contract was formed on the seller's terms.

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Quotations may be
evaluated in various
ways:

• On a comparative or 'competitive bidding' basis: eg the best

value bid or quotation 'wins' the contract (as in
competitive bidding or tendering)
• As a basis for negotiation with a preferred supplier (eg if a
preferred or approved supplier is asked to present a
quotation as the basis for negotiation to refine contract
terms)
• As a way of 'testing the market': checking the current market
price for requirements coming up for contract renewal.

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Some practices

• A buyer talks in terms of large quantities to encourage a price quote on that basis. However, the order is then placed for a smaller
amount which does not justify the low price thus developed.

• A large number of bids are solicited in the hope that the buyer will be able to take advantage of a quotation error.

• Bids are solicited from unqualified suppliers whom the buyer would not patronise in any case. These bids are then played against the
bids of responsible suppliers in order to gain a price or other advantage.

• A market is misrepresented by a buyer who places in competition the prices of seconds, odd lots, or distress merchandise.

• An attempt is made to influence a seller by leaving copies of bids, or other confidential correspondence, where a supplier can see them.

• A concession may be forced by dealing only with ‘hungry’ suppliers. The current philosophy is that a purchase order should create a
mutual advantage with a price that is fair and reasonable.

• Obscure contract terms of benefit to the buyer’s firm are buried in the small type of contract articles.

• A buyer may take advantage of a vendor who is short of cash and who may seek only to cover his/her out-of-pocket costs. (However, such
a situation poses a dilemma, since the vendor may be saved from borrowing at a disadvantage and may look upon such an order as a
blessing.)

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Contract types

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Consider why the following types of purchase might be

better suited to a transactional model than a
collaborative model.

• The purchase of utilities, such as gas and

electricity
• The purchase of courier services
• The purchase of commodities

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Supplier Performance
Management
Quantitative and qualitative
expectations
What do you expect from “Innovation”
your suppliers? Link to your organization’s
business goals

What are some of the typical challenges you

face when attempting to measure, monitor &
manage Supplier Performance, and

Describe what can be done to address these

challenges?

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How did Honda build the model ?

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100 percent
Lean supplier Flawless new
Six year model understanding of
development product launch
the cost model

Same part, same Quality at first

place, same source and Communication Standardization
process production

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Here are some examples of how value analysis has been

used to improve products and services:

•A manufacturing company redesigned its

products to use less materials and energy during
production. This not only reduced the cost of
production but also improved the environmental
sustainability of the products.

•A service company implemented new software

that automated many of its manual processes. This
saved time and money and improved the quality of
its services.

•A retail company changed its packaging design to

reduce the number of materials used. This reduced
costs and improved the product’s sustainability and
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Value Analysis:
Does the use of this product contribute value to our customers?

Is the cost of the final product proportionate to its usefulness?

Are there additional uses for this product?

Does the product need all its features or internal parts?

Are product weight reductions possible?

Is there anything else available to our customers, given the product's intended use?
Is there a better production method to produce the item or product?

Can a lower-cost standard part replace a customized part?

Are we using the proper tooling considering the quantities required?

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Value Analysis… contd.

Will another dependable supplier provide material, components, or subassemblies
for less?
Is anyone currently purchasing required materials, components, or subassemblies for less?
Are there equally effective but lower-cost materials available?
Do material, labor, overhead, and profit equal the product’s cost?
Are packaging cost reductions possible?
Is the item properly classified for shipping purposes to receive the lowest transpor- tation rates?
Are design or quality specifications too tight given customer requirements?
If we are making an item now, can we buy it for less (and vice versa)?

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Value =

(Quality + Tech + Service + Cycle time)

Cost &
Price
Value
Price Analysis & Cost Analysis
How does the Product Life Cycle
impact?

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Stages Opporutunities
Initial development stage Target costing/target pricing
Quality Function Deployment - Feasible cost - Risk Assessment.
Supplier concept competition/Kaizen compeittion.

Design and Launch stage Supplier integration, standardization, value engineering, design for manufacutring.

Product or Service launch Competitive bidding, negotiations, value analysis, volume leveraging, service contracts
– Demand adjustments – Engineering change control - Long term agreements

End of life stage Remanufacture recycle, refurbish the products.

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Strategic cost management

framework
Critical Products Commodities
Cost analysis Leverage preferred suppliers
Collaborative Cost reduction Price analysis using
efforts market forces
Supply Value

standardization

Unique Products Commodity Products

Cost analysis & Reverse price Total delivered cost

analysis Automate to reduce purchasing
Standardize requirements involvement

Number of Available Suppliers

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• Market structure
• Economic conditions – leading and lagging indicators

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Analysing the seller price:

• Does the seller have a long-term or short-term pricing

strategy?

• Is the seller a price leader (sets new pricing levels in the

market) or a price follower (only matches price
increases/decreases when the competition does so?

• Is the seller creating entry barriers to other competitors?

(like Jio)

• Is it market-driven or cost-based pricing?

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• Price volume model

• Market–share model
• Market Skimming model
• Revenue pricing model
• Competition pricing model
• Cash discounts
(2 percent 10/net 30)

Hedging

• Fixed Price swaps

• Collars
• Call options

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Cost-based pricing model

Cost mark-up Margin pricing Rate of return

pricing model model
pricing model

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Rate of return pricing model = if the supplier wanted a 20 percent return

on its investment of $300,000 (which might include R&D, equipment,
engineering, or other elements) to make 4000 parts with a total cost of
$50 each,

Compute the Price Quote ?

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Rate of return pricing model = if the supplier wanted a 20 percent return on its
investment $300,000 (which might include R&D, equipment, engineering, or
other elements) to make 4000 parts with a total cost of $50 each, the quoted
price would be $65 using:

• Unit cost + Unit profit = Unit selling price

• $50+ (20 percent X 300000)/4000 = $65

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Internal Internal
Knowledge Inventory
hoarding hoarding

Sourcing
Power plays
issues “Favourites”
politics
Prominent
ones are ….

Fear Trust

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Major
conflict

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Why is decentralization generally

disapproved by the top management ?

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Production
Decentralized Lack of Good
Reporting into
Low Expectations Purchasing Analytical Tools
Operations or
(Maverick Buying) (Standard)
Marketing

Supplier Product Variety

Short term focus Bad Press
Proliferation and Complexity

No Supplier
Development

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• Pulling forward sales to hit a revenue target

• Reporting “On Time in Full” measures
Funny Part of Supply against promised not customer
requested date.
Chain 
• Stockpiling product as an insurance policy
• Manipulate orders in favor of financial
reporting ambitions.
• manipulation of sales forecasts to
match
financial forecasts to the financial market

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• Misrepresentation of facts • Personal requirements

• Improprieties of Bids and Rework charges

• Price Disclosure • Unnecessary transport

charges
Unethical • Unearned discounts
(Cheque) &Cancellation
• Discrepancies in

acts in of orders Consignment

• Abuse of rate vs
• Thrusting decisions on the
Procurement supplier quantity
• Samples and Estimates • Supplier’s credit
facility
• Cost of Product
• Discourteous behavior to
Development Visitors

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risks and
finance

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Procurement Finance

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financing and risk mitigation

techniques and is far more likely to
be used in relation to open account
trade where the buyer and seller
have done business together before.

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Trade Finance

Trade finance products are long-

established and include letters of
credit, bank guarantees and
documentary collections, which are
all used more frequently when
trading partners do not know each
other well, or at all.

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Objectives

Firms are looking to an Companies cannot only

efficient and effective be dependent on
supply chain to fund revenues and financial
the growth of the management to grow
company. profit.

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Supply
Chain
Financing
Fund the growth

• Using the supply chain to

fund the organization,
and
• using the organization to fund
the supply chain.

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Types of working capital

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SKU
Pricing
Rationalization

Sources
of Mix Supply Chain
Operati Management Savings

ng
Capital: Functional
An Savings

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• The physical and financial supply chains are interrelated and are
driving the Asset Conversion Cycle (ACC) of a company.

• The ACC is the time it takes for a company to purchase raw materials,
convert those materials into finished goods, sell them and receive the

Asset
payment in return.

Conversi
• Running a company with cross-border activities and the execution
and settlement of commercial contracts to support those activities is
complex, increases the ACC and includes many risks.
on Cycle
• An important aspect is to ensure that a company gets paid when
selling its goods and that it can bridge the gap between the sale of
the goods and the payment so the cash flow is secured and happens
in time. However, looking at the company’s activities holistically,
there are many more aspects that are crucial to ensure that a
company stays liquid with its cash flow and can meet its financial
obligations at any time.

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Cash Conversion

Cycle CCC = DSO +

DIO – DPO

Days Sales Outstanding (DSO): the

number of days needed to collect
on sales.
Days Inventory Outstanding (DIO):
how many days it takes to sell the
inventory.
Days Payable Outstanding (DPO):
the company's payment of its own
bills.
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Operating Cycle
Buy raw material,
components or
finished product from Sell the product Collect money
Supplier

Days of Inventory Days of Receivables

- Raw materials - Invoicing

- WIP - Collection
- Finished goods - Application

(Kaplan and Norton (HBR), 1996)

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Cash to Cash
Cycle
Sell the Product
Buy Raw material,
Components or
Finished Product Days of Receivables
from Suppliers (97 days)
D
a
Days Payable
y
106 days
s Cash to Cash Cycle
185 days
o
f
Pay Supplier Collect Money
i
n
v Procurement - Copy
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130 n
t
o
r
y
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(
1
9
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E-Payables

P-Card

E-Payables

Virtual Card Ghost Card

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E-Payables – P-
Cards
Buying Firm
Supplier Firm
Chief Purchasing Officer

Retail
Commercial
Tie Cards
Co-Branding
Fraud
Security
Rebates

Bank
Processor
Card Issuer MasterCard Bank
Visa

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SCF vs. E-Payables

SCF brings CPO and
CFO together. The SCF for core suppliers,
tension used to be on large volume of money,
CPO focusing on price frequent transactions.
and CFO on working
cap.

P-card (or virtual card)

more for lots of SME
suppliers.

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Cash in advance

Four Documentary credit (Letter of credit)

basic
terms of Documentary collection

paymen
t Open Account

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