Lecture 2

Question 1

Kearney`s Purchasing chessboard

Answer 1

A.T. Kearney`s portfolio differentiates between the powers of supply and demand

X- Demand power
Y - Supply power

Leverage competition among suppliers (X high, Y low)
Seek joint advantage with supplier (X high, Y high)
Change nature of demand (X low, Y high)
Manage Spend (X low, Y low)

Question 2

Leverage competition among suppliers

Answer 2

Gain benefits from supplier´s competition for the company

Use the competition between the suppliers to get the best product, quality, price, etc.

Analytic tools help to influence the pricing
Levers of this strategy:

1. Globalization
2. Tendering
3. Target pricing
4. Supplier pricing review

Question 3

1. Globalisation

Answer 3

1. Global sourcing:

Global sourcing: Global sourcing aims at selecting the most competitive suppliers worldwide. This may sound obvious, but it is still true today that European companies mostly use European suppliers and US companies mostly use US ones, whereby this ignominious list could be continued almost indefinitely. (Opel GM)

Pro:

• Entrance to new procurement markets
• Cost benefits (1)
• Preservation of competitiveness
• Support of Sales
• Decrease of risks of exchange rate
• Establishing local Supply Chain (2)
• Local content regulations (3)

Cons:

• Cost risk
• Quality problems (1)
• Losing flexibility
• Logistics problems (3)
• Problems in communication (2)

2. Make or buy

‘A determination of what products or services a firm should manufacture or provide in-house, as opposed to purchasing from outside sources

Pros

• Advantages in competition to other companies
• Decrease costs for research and development
• Risks are shared
• Flexibility on the market
• Concentration on core processes

Cons

• Dependency on supplier
• Lose knowledge
• Long-term contracts limit the flexibility
• Company secret is not kept
• Higher investment for coordination and logistics

3. Low Cost Country Sourcing:
   ‘Low Cost Country Sourcing means all actions to provide a company with materials, services, Rights and also machines and constructions from suppliers in countries which have a gross national income from less than 11.905 US-Dollar and are able to provide the developed countries with goods with the right quality and number to reach advantages in competition.’

Depends on:  
- the kind of material/good
	- the volume of sourcing
	- which importance the material/good has:
		 Strategic parts
		 Bottleneck parts
		 Standard parts
		 Spot market parts

Exogenous Risks:

• Political risk
• Legal risk
• Economic risk
• Socio-cultural risk

Endogenous Risks

• Supply risk
• Information risk
• Financial risk
• Legal risk

4. Best Shoring

• Onshoring: manufacturers have their suppliers in striking distance
• Nearshoring: dislocation of functions and processes of a company to neighbouring foreign countries
• Offshoring: dislocation of functions and processes of a company to foreign countries („Auslandsverlagerung“)
• Outsourcing: give tasks or structures to service providers to concentrate on core competence

Question 4

2. Tendering

Answer 4

Tenders will be released by companies in special platforms (e.g. internet forum, ERP system, etc.) and providers submit there a proposal about what, when and how they can act.

These proposals will be collected, verified and evaluated according to specified criteria by the client

Getting the best result in according to the determined criteria

Good tendering:

• Identification of suitable suppliers
• Collect information about already completed transactions
• Preparation and realization of useful tenders
• Analysis of all submitted offers
• Negotiation with suitable suppliers

1. Supplier market intelligence
2. One of the most important functions of a strategic purchasing department is a thorough knowledge about the supplier market (Collecting thorough knowledge about the market)
3. The department has to gather all information of new and old suppliers and refresh all information continuously (Gather all information about potential- and known supplier = continuous refreshing process)
4. Important is the systematic compiling of supplier information, in the best way in form of a central supplier database (Save all relevant data in a central supplier database)

Internal information:

• Cost-oriented figures (Spends, Price development)
• Key figures (Quality, Results, Supply capability, Innovation)

External information:

• Credit information about suppliers
• Press information
• Reputation on the market

2. Request for information (RFI/RFP)

RFI/RFP processes are one of the basic procedures for a purchaser. The RFI should be quite easy and short. Whereas the request for proposal is more detailed and comprehensive.

1. Introduce the company to arouse interest in a briefly covering letter
2. The RFI should include key information about the company size, sales, employees and customer referrals
3. The next step are questionnaires to get a small amount of key information from a large number of possible suppliers. This enables the purchaser to check the suppliers technical standards and the interest to perform
4. After getting the key information from the RFIs, the purchaser sends comprehensive tender offers and specification sheets to suppliers of the selected shortlist.
5. Suppliers submit in this documents their notes, improvements, proposals, etc.

After getting all proposals, the purchaser has to pick the most suitable supplier.

Advantages of the RFI (general information about the company)/RFP (specification about the border “can you produce a wall of 4 meter, are there cameras, etc)/RFQ process (delivery terms, incoterms, prices):

• Good overview and comparability over all submitted proposals
• Create a competition between the suppliers at an early stage of the whole tendering process
• Generates variety and diversity in processes
• Fast and easy creation
• Easy supervision
• The process is simple to handle and to adapt
• Speeds up the negotiation, especially by already known suppliers

How does it look like:

A RFP should be written with a clear and easy understandable structure
Easy to handle (e.g. multiple choice, short answers) Ausschreibung Beispiel.docx
The invitation of tender should include the quantity structure sheet and the data sheet Anlage 2 Mengengerüst_Beispiel.xlsx; Anlage 1 Ratenblatt Beispiel.xls
Already existing data about prices should be shared with suppliers that they get a rough idea about it
The acronyms should be coherent with the international incoterms 2010 Incoterms2010.pdf

3. Expressive Bidding

The expressive bidding method enables suppliers the option to negotiate in a certain framework.

For example: If you give us the possibility to deliver, beside product A, also product B, we will grant you a price reduction of 10 %.
These proposals are called if-then conditions.

\+ for Customer
Cost Saving
Low workload 
Supplier friendly
Flexible

\+ for Supplier
High flexibility
Opportunity to stick out of the mass
Opportunity to gain more profit
Develop economic relations 

4. Reverse Auction

• An auction should take at least 30 minutes – why?
• Reverse auctions usually work with web based tools
• To reduce processing time it is useful not to include more than 20 suppliers in one auction.
• Prior the auction a decision has to be taken about the auction scope. This means, should the whole contract be auctioned or every position by itself

2 types:

from high to low costs,
from low to high

Question 5

3. Target Pricing

Answer 5

• Analytic method to identify cost structures of products
• Depending on the method or initial situation the target price characteristics changes
• A known approach in the automotive industry, but other businesses haven´t used it until the last few years
• This strategy enables not just cost reductions also more transparency and a better risk management

1. Cost-based price modeling

• This process-orientated approach analyses several process steps to calculate the relevance values.
• This method focus no longer on the costs-per-piece but on cost-per-process step e.g. welding of steel, price of welding in addiction of the product length
• One of the reasons why the purchasing market has established this method is that the traditional cost savings are nearly exhausted
• Enables a price post calculation

Will be done by B and C parts

Pen example:

1. The first step calculates the total possible costs of the whole pen
2. Then it will be checked how much the several pieces cost
3. The last step is the combination of the price of the several pieces and the costs to assemble the whole pen with the several process steps

3 different cost-break-downs possibilities

1. Cost breakdown possibilities:
   Request to the supplier about the process cost and not the unit price
2. Cost comparing
   Comparing internal available cost data of process steps. This method is quite easy but it can happen that the internal cost information were to high in comparing to the external supplier values
   3.Post calculation
   The post calculation implements not only internal data also external supplier data will be analysed. After the cost calculation the purchaser has to check the most competitive cost positions with each other. For that he can use the best price or the top 25 percent. The result is another basis for target pricing

2. Cost-regression analysis

The cost-regression analysis bases on the statistical regression analysis, which means it quantifies the dependence between several variables and describes that in a formula
Hotel room example: the prices of hotel rooms depends on several factors e.g.
Location: Business-City hotel, Suburban hotel, country side hotel
Chain: is this hotel a member of a chain or is this a one-man business
Size – furnishing of the hotel (SPA, fitness)
Quality of the restaurant, etc.

→ all factors, which are qualitatively and can be fast listed, can explained mathematically

There are two main questions which have to be resolved (Hotel example):

Which factors influences the room price (and which have no proven influence)?
What influence does a specific factor have on the price? (Location is a high cost factor)

The regression analysis evaluates e.g. linear relationships between costs of assembly units and their technical parameters

Characteristics

• Cost-regression analysis are used mostly by purchasing departments
• Can identify high-price periods, which will be solved by renegotiations
• Regression analysis are used as well as a partnership and optimization tool

Advantages

• Enables a fast organization and transparency of overlapping processes
• Shows if a supplier sells several or all parts and the respective services too expensive
• 3. Linear performance pricing (LPP)

Linear performance pricing identifies the cost driver of a sourcing group with the respective price. On that basis, it is possible to calculate the objective target price. (Process cost reduction)

1. The main question is, what is the relevant cost driver?
   E.g. a cast-iron form where the weight could be the one but also the cross-section could be the relevant cost driver
2. The correlation analysis can help to identify the right cost driver
3. This analyse measures the correlation between the cost driver and the original price => this is called the correlation coefficient
4. The cost driver with the highest correlation coefficient is the relevant driver (rule of three)

! There can be only one relevant cost driver!
! That means the products/parts where the process cost should be reduced have to be quite simple
! Objects with many process steps are unsuitable!!!

Examples for suitable parts:

Cast parts,
Raw steel,
Copper wire,
All kind of raw materials, etc.

4. Factor-cost analysis

The factor-cost analysis tries to aim a high potential of transparency and utilization of resource differences

These resource differences are mainly location differences, what means that e.g. labour costs are in other countries just 1/50 of the German labour costs (extreme case)
Even in Germany price differences exists, the office rent is for example in Berlin much cheaper than in Munich

Examples for resources:

Energy costs, labour costs, waste disposals, rents, etc.

3 steps:

1. Identify the needed resources to produce
2. Than add the cost driver data like set-up times, productivity, machine hour rates or alternative prices for main materials to the resource costs
3. The calculated costs have to be compared with other suppliers or other regions

Question 6

4. Supplier pricing review

Answer 6

Problem:
Prices are often not calculated with the ‘cost plus’ method
Development and tooling cost are not considered consistent
Mixed calculations make the price non-transparent
→ Establish standards for the whole pricing procedure
Used Methods:
- Price Benchmark
- Total Cost of Ownership (TCO)
- Unbundled Prices
- Leverage market imbalances