“Project 100. How To Save 100 Million Dollars. Really!” Juergen Freund, Vice President Purchasing
Merck-Serono Frankfurter Strasse 250
64293 Darmstadt Germany
+49 6151 72 2243; juergen.freund@merck.de Apollon Fanzeres, Director of Corporate Procurement
DENTSPLY International 221 W. Philadelphia Street
York, PA 17404 USA
+1 717 - 849- 4725; afanzeres@dentsply.com
93rd Annual International Supply Management Conference, May 2008 Abstract.
The workshop will be a step-by-step Playbook on how to start, conduct, and finally succeed with an effective cost reduction program. It will include templates and forms to facilitate the implementation process covering:
1) General recommendations for success
2) How to get visibility of your category spending and level of Purchasing resources currently being used to support that spend
3) Category Strategy Development, which includes a) Opportunity Assessment
b) Supplier segmentation
c) Business cases with category prioritization and assessment with plans for deployment
4) Results Tracking and Reporting
At the conclusion of this workshop, participants will have a detailed Playbook that can be used on “Monday morning” to initiate this process leading to savings greater than 20%.
General recommendations for success. There are a few critical “do’s” and “don’ts” when starting the project. Gaining senior management support for your initiative is a critical success factor. If you have already secured their support you are ready to move forward; otherwise you will need to develop and present a business case to secure their buy in. Also you will see that it is important to select, motivate, mobilize, and provide incentives for a team to succeed and to prevent or manage with any resistance. Always remember that “Project 100” will be a change management initiative for your organization.
Spend Visibility and Current Level of Purchasing Involvement. The first step for a project such as “Project 100” is to have visibility into your spending patterns and to understand to which extent Purchasing has been involved in the different spend categories. For the purpose of this presentation we will consider spend analysis as the process of aggregating,
categorizing, cleansing, classifying, and analyzing corporate spending data in order to prepare the required analysis and proposals for “Project 100”.
If you already have an automated spend analysis tool in place, great! You know how to get the required data. What if you don’t have such a tool? First you need to get a list of all your
suppliers for goods and services with their respective spending. Make sure you include all the suppliers (or as many as possible) even if your purchasing department is not presently
involved in the process. During the workshop we will discuss how to get the data, the pros’s and con’s of the different data sources, and how to analyze it.
Category Strategy Development
Opportunity Assessment. After you have collected your spend data you are ready to
perform what is called an “opportunity assessment”. Look for (a) categories with large spend, (b) categories with large number of suppliers (even if low spend per supplier), (c) categories where Purchasing has little or no involvement, and (d) supplier segmentation based on
strategic relevancy. We will demonstrate a simple template that can be used for this purpose (XRay tool).
This assessment enables you to find and prioritize “Project 100” opportunities showing
expenditure categories by value, and provides a first review of market and industry trends and provides an opportunity to assess your current sourcing strategy. This is important: it will be the first time you are in a position to present what is truly possible from a savings potential. Supplier Segmentation. For the purpose of “Project 100” we will focus on segmenting the suppliers according to the strategic value of the relationship. This allows us to draw attention to where the highest value is for “Project 100” and enables your organization to achieve significant savings as resources are allocated strategically for maximum value.
For this exercise, the segmentation model taking into account Supplier importance (and criticality and risk exposure) and Supplier alignment will deliver sufficient insight for your organization to develop future purchasing strategy (see figure below).
During the workshop you will see how to apply appropriate sourcing strategies depending on the current segmentation of your suppliers.
Business Case. Now that you have the spend data as well as the allocation of your current business into the supplier segments, you need to identify and define the opportunity and the action you will take. This will be accomplished by completing a business case. Make it challenging, but realistic! Because time is always a factor, we have developed a so called “one-pager”. You might consider this a “business case light”.
The business case should cover all relevant information in order to make an assumption for: • savings potential
• efforts needed to execute all activities necessary to get expected results • subsequently, a ranking in terms of prioritization
Although we want to limit the effort to the absolute minimum required, for the assumptions above you need the following information:
1. What is your overall objective for the business case? In other words: what do you want to achieve?
2. What is your approach and what are your key activities to achieve that? Be short and precise. If helpful, you could cluster your activities.
3. What is the time required for these activities and expected time lines? 4. What will be the deliverables when a specific activity is completed? Once you have all this completed you still must determine:
• The scope of your “one-pager”
• Critical success factors and the potential risks
Now you can select the project team, the project team leader, and rank all “one-pagers” according to your priorities. Your current resources will be the only ones available, at least at the start of the project unless you succeed to convince top-management to approve additional resources.
The business cases need to be summarized and presented to Top-Management for approval. This marks the starting point of your actions for Project 100!
Sourcing Process. Streamlining Purchasing activities through strategic sourcing enables firms to capture measurable cost and cycle time improvements across traditional Purchasing activities. Through strategic sourcing, Purchasing professionals can also affect a variety of shareholders value drivers such as revenue growth, operating margins, and cost of capital. There are a number of tactical and strategic techniques that drive savings in the Purchasing process. The initiatives that will directly impact Project 100 include:
• Obtaining a competitive purchase price through negotiations and re-negotiations • Reducing the total cost of ownership by consolidating and leveraging total spend • Improving supplier performance
• Engaging in low-cost country sourcing • Deploying electronic tools (e.g. e-auctions)
Typically a strategic sourcing approach consist the following nine steps: 1. Assessment of Category and Project Team
2. Goals for Project
3. Evaluation of Current Market and Data Analysis 4. Develop Sourcing Strategy
5. Identify Suitable Suppliers
6. Final Negotiations / Writing the Agreement 7. Implementation
8. Ongoing Management and SRM 9. Restart assessment for Category
Results Tracking and Reporting. Because of the high expectations build for Project 100 it is necessary for Purchasing professionals to measure performance in a commonly accepted manner – typically approved by Finance. It is also important to understand that there are many different ways to measure savings and none of them are perfect! What is key to recognize and accept is that these measurements have to be reproducible accepted (by the management), and are manageable. A careful equilibrium of process rigor and efficiency is required to
ensure acceptance of Purchasing value measurements. Simplicity has priority over perfection. Some areas that we considered for performance measurements of “Project 100” were:
• Common Definitions • Credibility of savings • Accuracy of savings • Ability to track savings
Before implementing a cost savings measurement program, Purchasing must gain support of top management and finance. To maximize success, be sure that the savings methodology selected is accepted and validated by Finance. To further gain credibility we recommend that
