Strategic Sourcing Report
“The Importance of Sourcing Process Innovation and Practical Use of B2B Tool” 1. Importance of Sourcing process innovation and its value
The idea of "Strategic Sourcing" was created in the U.S. and its activities have been performed mainly in the 90s. On the other hand, Japanese companies have gradually been taking place its efforts from 2000 and have been producing good results.
For example, GE regards "purchasing process" as a basic structure that optimizes the expenditure, and carries it out as "Sourcing." The main roles of “Sourcing” are to evaluate the possibility of cost reduction, to select the vender, and to manage the price. “Sourcing” includes broad range of strategic service to optimize the amount of the whole organization’s consumption. “Sourcing” deals with not only the direct materials contained in the production related such as direct materials and production parts, but also factory MRO. Its target extends even to the indirect materials and services which are part of the general expenses. The monetary effect exceeds over 700 billion yen every year in the GE Capital business only.
The case of Nissan Motor is often raised as a typical example in Japan. In Nissan Motor, based on NRP (Nissan Revival Plan) in 1999, company-wide cost reduction has been successfully achieved and its profitability has recovered. Nissan Motor’s co-chairman Mr. Koeda, who was a director specializing in purchasing, said, “The sourcing activity helped the acquiring of materials related to service and support which had been lagging thus far. This attributed to the generating of cash flow in a short term.”
These efforts in Japan are not limited to automobile and electronics industries. Others such as the medical, finance, service, and distribution industries have also started to take those efforts.
The main features of the strategic sourcing in Japanese companies in recent years are as follows:
1. The range of materials is not only in conventional direct materials and parts, but also the factory MRO, indirect material, and service.
2. The range of industries has also greatly been expanding.
The advancement in strategic sourcing was promoted by the rapid progress of Internet Technology. Some supporting tools for sourcing have been developed. “E-RFQ” and “Reverse Auction” are important tools to enhance the efficiency of estimating. Electric ordering systems such as Web-EDI and catalog purchasing are the other examples utilizing Internet Technology. Many types of system provider services have also appeared. It can be said that recent progress in practicing of strategic sourcing has been made possible by the appearance of various tools and services such as software, ASP, which was developed from market place, and purchasing outsourcing service, which combined services of corporate purchasing and distribution functions.
2. The aim and methodology of sourcing process innovation
The fundamental idea of strategic sourcing is to separate sourcing process from purchasing process. Sourcing is a process which creates a request for an estimate for every purchase opportunity, searches for available suppliers, evaluates and chooses the supplier, determines the price range, and makes a final contract. Purchasing, on the other hand, is a process of sourcing execution based on the sourcing contract. If strategic sourcing is not performed, sourcing activity occurs every time a purchase demands arises. Strategic sourcing has the fundamental principle of choosing the recommended suppliers on an annual basis and polling the order quantities together to gain scale merits. It results in favorable contraction. The fundamental methodology of sourcing process innovation is to separate of sourcing process from purchase process and to poll together the amount of orders.
3. Methodology for purchasing process improvement
Generally speaking, the purchasing process of direct materials such as raw material and parts has already been build into the production planning system such as MRP system and purchase ordering system. In recent years, the SCM projects aiming to reduce inventory and shorten the lead-time of order to delivery have been promoting.
However, purchasing process for indirect materials and services is not usually automated in those efforts. Moreover, item level purchasing data is also not covered in most cases. Therefore, it is almost impossible to manage basic data such as the number and price of purchased items.
Moreover, items may not be purchased from the suppliers who have signed the contract through the sourcing process, because many companies only care about the limits of their budgets and doesn’t care about where items should be purchased. As a result, the expenditure cannot be optimized and it results in a waste of money.
In order to solve these dilemmas, the history of purchasing activity should be recorded, using IT tools such as catalogue purchasing system. In Catalogue purchasing system, items under the contract of sourcing activity are listed. If a purchasing item matches a listed item, the purchasing item is bought at the contracted price from the contracted suppliers. This way, the purchasing management can be supported on an item level. The main targets of this management are office supplies, office furniture, and factory MRO.
Catalogue purchasing is effective for companies that presently haven’t used contractual purchasing, large global companies, in which the across-the-board purchasing management cannot be executed without a system support, and companies that have undertook many rounds of M&A activities.
Even in contract-purchasing categories, there are many items that are difficult to put into a catalogue. Contract employee and contract cleanser are out of the
target because their quantities are hard to estimate. Other items are consulting expenses, project related IT expenses, and construction fee, for these require an individualized contract in every purchase.
In deed, these items occupy a large portion of the overall expenditure. However, they can be managed by utilization of e-RFQ. In e-RFQ, a buyer calls for retrieval suppliers to provide their estimates for every purchase. After the buyer agrees on an estimated price, the buyer approves the supplier and price. With this work flow in e-RFQ, the purchasing management can be realized. Item prioritization leads to optimum external expenditure. The purchasing
data stored for each item is utilized in the subsequent sourcing process. This is the basic idea.
4. Standardization of sourcing process, and practical use of the reverse auction
A sourcing process is a flow of a series of actions; creation of estimate requests, selection of candidate suppliers, prosecution of estimate requests, adjustment of the estimate replies, price comparison with the suppliers, adoption of a supplier/a price, and signing of contract. It has been widely thought that sourcing business requires specialist expertise for each item because of tough price negotiation and cost evaluation.
On the other hand, the standardization and efficiency improvement of this sourcing process have been promoted because of the appearance of IT tools such as reverse auction and e-RFQ, needs for globally optimized purchasing or group purchasing, and concern for indirect materials purchasing. This leads to sourcing process improvement.
What is sourcing process improvement? Its goal is, 1. To increase company’s purchasing capability, 2. To make an efficient sourcing process, and 3. To create strategic sourcing tasks as everyone becomes to perform sourcing with the defined process tool based on the common information.
In standardization of sourcing process, the common challenge lies in the both direct and indirect materials. On the other hand, as far as IT tool utilization concerned, different problems exist in every item and process.
The representatives of the standardization tool for sourcing process are e-RFQ, Catalogue maintenance tool, and Reverse Auction.
E-RFQ, a core of sourcing tool, aids to request for estimates and to get replies. However, e-RFQ cannot provide enough effects as long as it deals with the conventional information treated by FAX and mail. As we have already mentioned in the purchasing process improvement, in e-RFQ the linkage of recommended suppliers to the database on each item is constructed, and the estimate requests are issued automatically to suppliers based on the item. Furthermore, historical estimate and price data are used for the checking of the validity of the current estimate. This results in the enhancement of purchasing capability and work efficiency.
maintenance tool, the estimate comparison of a large number of items is performed, and contract price re-evaluation is carried out annually or semiannually. The latest model of e-RFQ provides templates including specs for proposal format and detailed estimate categories, and comparison tables placing estimates provided by multiple suppliers. This type of tool utilization is a good example to realize an enhancement of sourcing task efficiency. Reverse Auction is a tool to automate negotiation process. Reverse auction is
effective for standardization and efficiency promotion of sourcing process. It is also powerful in getting market price. Previously, such auction tool has been often regarded as a price dumping tool in Japan, and Buyers still have a resistance to the practical use of reverse auction. On the contrary, in the U.S., practical use of reverse auction has already deep-rooted, and a growing number of companies are likely to apply it in the near future.
According to the 2002 investigation of CAPS Research*, more than 50% of the large U.S. companies have an experience in Reverse Auction. Although average amounts covered by reverse auction is only 5% of the overall expenditure, there are some companies in which reverse auction covers more than 25% of the entire expenditure. It also appears that the future of auction practical usage shows rapid growth (10-15%), and not only cost reduction but improvement of process efficiency are expected.
Investigation of CAPS Research also indicates that the effect of reverse auction shows average of 15% of cost reduction, as well as roughly 10% of cycle time reduction. According to experience of Agile Associates, about 20% of cost reduction and 10% of man-hour reduction are practically possible.
However, to successfully achieve the cost reduction by use of reverse auction, the critical factors are as follows; “consideration of volume increase”, “participation of new suppliers”, and “clarification of the specs”. The development of competitive environment and the establishment of concrete RFQ are the key factors.
However, it is clear that reverse auction cannot be applied to all processes and items.
Sourcing process improvement is to properly use sourcing tools for every item in order to standardize the process, enhance the efficiency, and improve the fundamental sourcing capability of corporations.
5. Introduction of Agile Associates and our consulting service
Agile Associates is a company comprised of experienced professionals, who have great track record in the GE group sourcing activities, and has great experiences in direct and indirect materials sourcing innovation programs in a major Japanese automotive company. We have been focusing on the optimization of sourcing/procuring process. Our approach is totally different from that of conventional IT oriented. In our consultation, process improvement support is provided according to a client’s current status and
problems. Our strength comes from valid experiences of many consulting projects in various industries. Our ability to deliver the highest result and our keen sense of how to implement sourcing process innovation separates us from others.
The strategic sourcing solutions provided by Agile Associate can be roughly classified into the following four areas:
1. Sourcing process innovation and the building of foundation to reform process, organization, and IT. This solution can be applied to both direct and indirect materials.
2. Consulting service for the effective use of sourcing tools.
3. Representative service in delivery of sourcing activity for indirect material and factory MRO.
4. Selection and sales of sourcing tools
In recent years, according to the strong demand of our clients for use of IT tools such as e-RFQ and Reverse Auction, we have teamed up with Interlogics Inc. We now provide Nesy-Tender and consulting supports to utilize it.
Nesy-Tender is affordable tool that can be used with a fee from 100,000 yen per month. It includes main features of e-RFQ (ASP type) and functions of Reverse Auction.
Agile Associates offers a wide range of strategic sourcing services. We work on experimental use of an inexpensive tool, representative action of sourcing process, continuous structure maintenance, regular settlement of sourcing innovation, and development of purchasing system.
To achieve sourcing innovation step-by-step approach can be taken. This allows experimental implementation according to verified results in every step. Thus it is said that this structure leads to rapid improvement of ROI.
As a matter of fact, some sourcing functions still require regional characteristics. For example, sourcing activities for indirect materials should basically be purchased in local community to utilize those effects.
We are totally confident that we can help you in various activities such as domestic deployment of global sourcing, local implementation of sourcing, resolution of resource shortage, practical use of tools, consulting service, and outsourcing service.
* CAPS Research “The Role of Reverse Auctions in Strategic Sourcing” by Stewart Beall, C.P.M., Craig Carter, Ph.D., Phillip L. Carter, D.B.A., et al.
