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“Direct” Spend Management: Optimizing spend and increasing direct material availability

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Information about “Direct” Spend Management: Optimizing spend and increasing direct...
Business & Mgmt

Published on March 6, 2014

Author: Genpactltd

Source: slideshare.net

Description

In the last few years since the Great Recession, organizations have attempted to optimize supply chain operations and position themselves for growth over the next 3-5 years. This includes tapping “low-hanging fruit” in the optimization journey, largely in the indirect sourcing transactional services such as logistics. Procuring “direct” material, however, seems to be a relatively untapped opportunity for organizations to continue optimizing their supply chains. Inevitably, companies can benefit significantly more by opting for an end-to-end framework rather than through incremental improvements to direct spend management processes.
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MANUFACTURING “Direct” Spend Management: Optimizing spend and increasing direct material availability Advait Rahalkar Assistant Vice President, Supply Chain Practice, Genpact In the last few years since the Great Recession, organizations have attempted to optimize supply chain operations and position themselves for growth over the next 3-5 years. This includes tapping “low-hanging fruit” in the optimization journey, largely in the indirect sourcing transactional services such as logistics. Procuring “direct” material, however, seems to be a relatively untapped opportunity for organizations to continue optimizing their supply chains. Inevitably, companies can benefit significantly more by opting for an end-to-end framework rather than through incremental improvements to direct spend management processes. Focusing on Availability and Spend Optimization Taking an End-to-end Approach The relatively flat or negative growth estimates in developed Inefficient process steps and broken linkages between processes often lead to poor direct spend management: economies and the slowing of growth in emerging economies has created significant uncertainty around demand for goods in the global economy. Consequently, producers are unable to forecast the demand for products across markets with reasonable accuracy. This uncertainty has had an impact on demand forecasts for “direct” material. At the same time, organizations wary of the demand fall-off since 2008 are attempting to avoid surplus inventories of direct material while trying to maintain sufficient stock to minimize or avoid lost customer orders. The result is a significantly greater focus on two important performance measures for direct sourcing: (1) availability of direct material and (2) optimizing the spend associated with it. • Lack of a dynamic inventory planning capability can result in 10-15% surplus inventory • Ineffective expediting techniques can degrade supplier on-time delivery by 5% or more • Lack of focus on tail-end spend can lead to non-realization of up to 10% or more of direct spend savings Each such “broken” process can lead to capital becoming locked in surplus inventory, or may result in non-availability of direct material to process customer orders. The traditional approach has been to improve one segment of the direct material management process to achieve incremental gains in spend optimization and/or material availability.

However, in order to become best-in-class in managing their direct spend and gain competitive advantage in the marketplace, organizations need an end-to-end improvement framework. A typical such framework should address the following processes along the transformation journey to industry-leading direct spend management: Each of these six levers for direct spend management should be • Forecasting Should-cost analysis provides the sourcing function with the details supported by enabling technology tools and well-defined techniques that support improved business outcomes, as described below. Should-cost Analysis of component costs, labor inputs and the cost of a supplier’s value • Inventory planning add. • Strategic sourcing of direct material The sourcing function can potentially derive the following benefits • Supplier performance management if provided with a detailed Should-cost analysis: • Procurement support • Insights into the cost build-up for a component or a A successful approach to transformation of direct procurement addresses six key drivers: 1. Shared Services: The providers should have the ability to set up and manage highly flexible shared services operations, either near-shore, on-shore, off-shore or a combination of these. 2. Performance Measurement: Shared services provide direct procurement functions the ability to control performance measures. Application of Lean Six Sigma frameworks allows for continuous process improvement. 3. Spend Analysis: Direct material spend analysis provides significantly higher visibility into key suppliers, supply sources, maverick spend and contractual compliance. 4. Cost analysis: Identification of various cost components such as materials, labor and supplier value-add provides significant assistance in supplier negotiation and make-versus-buy decisions. 5. Sourcing Support: Sourcing support, especially from low-cost countries, helps drive cost reduction and higher profitability. 6. Engineering Services: The ability to leverage “value-engineer” components can result in actionable recommendations for optimal material changes or manufacturing process changes. Direct Procurement Transformation - Structured Approach sub-assembly • Assistance with make vs. buy decisions • Information useful to negotiation discussions with suppliers, especially when products and services are bundled • Reduction in the cycle time for completing the procurement process by eliminating the cost discovery phase for the buyers Should-cost Impact For a client in the discrete manufacturing space, Should-cost analysts reviewed purchased sub-assemblies, developed the Should-cost analysis, and compared it with existing prices. By doing so, the company was able to: • Identify cost reduction opportunities of 10-15% • Provide techno-commercial inputs during supplier negotiations Should-cost analysts, however, need to be supported by an understanding of the buying environment. Detailed Should-cost analysis for components and sub-assemblies. can identify up to 20% in cost reductions. Tail-end Spend Analysis Tail-end spend is a component of the overall direct spend that is Operational Flexibility not addressed by sourcing leaders or commodity managers. Maximize Value Generate Value Shared Services Value Engineering a paucity of resources or a lack of data analysis tools to negligible Lean Optimization Levers for transformation LCC* Sourcing Support Enhance Profitability Reasons for tail-end spend remaining unaddressed could vary from A tail-end spend analysis for an aerospace component Spend Analysis Should-cost Analysis impact on annual deflation targets. manufacturer identified cost savings up to 20-22% for fasteners, gaskets, rings, and other C-class parts. Increase visibility Tail-end spend typifies the 80:20 rule in that approximately 80% of Baseline Cost * Low Cost Country © 2012 Copyright Genpact. All Rights Reserved. the spend is consumed by 20% of parts and sub-assemblies. The remaining 80% of parts and services, which can potentially run to

thousands of unique parts and sub-assemblies, consumes about Companies can leverage a range of best-practices for achieving 20% of the direct spend. In large buying organizations, this bottom excellence in demand forecasting: 20% is called tail-end spend and might be left unaddressed. A significant number of C-class parts is likely to be part of such tail-end spend. A structured approach is needed to address tail-end spend. Classification, cleansing of data, spend analysis, recommendations and execution of recommendations to realize deflation benefits for clients make for a comprehensive approach that drives better • Deploy a single system of truth: Master data for forecasting needs to be clean and up-to-date. • Make forecasting a continuous process rather than event-based. Forecasting analysts should be able to update forecasts based on new information available regarding customer buying patterns and key market trends. results overall. Supplier Performance Management This includes (re)-classifying parts into commodities based on A supplier performance management framework to effectively acceptable conventions, followed by removal of inaccurate data to monitor performance, report, and address issues proactively entails: ensure that spend analysis, a subsequent step, is conducted on “clean” spend data. Spend analysis results in identification of • KPIs for supplier deliveries and supplier issue resolution opportunities for demand consolidation across manufacturing sites, • Strategies to communicate demand changes or expedites reduced maverick spend, improved contract compliance, and in some cases, standardization of part specifications to consolidate part demand. The final step is to engage with potential suppliers, gather quotes, and foster realization of the value identified in the spend analysis phase. Driving Excellence in Demand Forecasting • Prioritization of supplier communications • Weekly/monthly reports and supplier performance scorecards The supplier performance management framework is supported by a workflow management tool that enables work allocation and reconciliation and analysis of supplier transactions. The tool is Quite often, organizations continue to use demand forecasting capable of processing inputs from all standard ERP systems and techniques that do not provide the flexibility needed to operate in allows for rapid customization to accommodate specific client the current competitive environment. It is not surprising to find requirements. demand forecasting conducted as spreadsheet-based, manual activity. The problem with such processes is the difficulty of adjusting forecasts or the lack of any ability to broaden the input data to create new forecasts. Moreover, the inability to consolidate forecasts for direct material across divisions makes demand forecasting even more complex. The supplier performance management framework has been effectively deployed to manage direct procurement support processes for high volume C-class parts. Better Performance through Smarter Processes Organizations are increasingly keen to focus direct sourcing efforts on fewer and more impactful spend categories. Service providers Forecasting Excellence can support such a strategy by deploying end-to-end direct spend For a healthcare equipment manufacturer, a new approach significantly improved the demand forecasting process. frameworks for smaller categories that would otherwise remain The direct material management process did not have a robust forecasting process for its inventory organizations across the globe. The client needed to improve availability of material and reduce surplus inventory. Forecasting analysts developed a forecasting approach for the inventory organizations and redefined key master-data values like safety stock levels and lead times. These improvements resulted in doubling the forecast accuracy, instituting a standard business process for forecasting, and reduction of ~ $1M of surplus inventory. unaddressed by sourcing functions. Spend categories within C-class parts are potential candidates for such service provider engagements. A well-thought approach that addresses forecasting, inventory planning, strategic sourcing and procurement for C-class part categories can allow service providers to drive deflation and provide significant value to otherwise unaddressed “direct” spend.

About Genpact: About the Author Genpact Limited (NYSE: G), a global leader in business process and technology management services, leverages the power of smarter processes, smarter analytics and smarter technology to help its clients drive intelligence across the enterprise. Genpact’s Smart Enterprise Processes (SEPSM) framework, its unique science of process combined with deep-domain expertise in multiple industry verticals, leads to superior business outcomes. Genpact’s Smart Decision Services deliver valuable business insights to its clients through targeted analytics, reengineering expertise, and advanced risk management. Making technology more intelligent by embedding it with process and data insights, Genpact also offers a wide range of technology services. Driven by a passion for process innovation and operational excellence built on its Lean and Six Sigma DNA and the legacy of serving GE for more than 15 years, the company’s 55,000+ professionals around the globe deliver services to its more than 600 clients from a network of 58 delivery centers across 16 countries supporting more than 25 languages. Advait Rahalkar Assistant Vice President, Supply Chain Practice, Genpact For more information, visit www.genpact.com, Follow Genpact on Twitter, Facebook and LinkedIn Copyright © Genpact 2012. All Rights Reserved. www.genpact.com Advait Rahalkar is Assistant Vice President in the Supply Chain Practice at Genpact, a global leader in business process and technology management, where he is responsible for building solutions associated with sourcing for direct materials and services. Advait has over 10 years experience leading direct and indirect sourcing operations and applying lean-six sigma frameworks to improve sourcing business processes. He holds a masters’ degree in Business Administration and is a Mechanical Engineer.

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