Direct Materials Sourcing and Procurement Strategies – Accelerating Savings and Improving Risk Mitigation

Direct Materials Sourcing and Procurement
Strategies to Drive Accelerated Savings
and Improved Risk Mitigation
Speakers
• Heather Ashton – IDC
• Colleen Rowley – ITW
• Sundar Kamakshisundaram – Ariba, an SAP Company
#AribaLIVE
@ariba

Agenda

•
•

Introduction
Panel Discussion
Thought Leadership Insights from IDC
–
–

Overview of Direct Materials Sourcing – Business Drivers and Challenges
Identifying and Improving Risk Mitigation – Guidance

Direct Materials Sourcing @ITW

•
2

Q&A

© 2014 Ariba – an SAP company. All rights reserved.

The Panel Team
Speakers:
• Heather Ashton – IDC
• Colleen Rowley – ITW

Moderator:
Sundar Kamakshisundaram

3


Direct Materials Sourcing and
Procurement Strategies - Accelerating
Savings and Improving Risk Mitigation
Heather Ashton, Research Manager, IDC
@HeatherAsh_IDC
March 2014

#AribaLIVE
@ariba


Agenda

•

•
•

Overview of Direct Materials Sourcing – Business Drivers
and Challenges
Identifying and Improving Risk Mitigation – Guidance
A Closer Look at How Ariba Customers Are Managing Direct
Materials Sourcing
ITW

•
5

Questions and Answers


The Productivity Imperative

Platform 2 –
Client/Server to
Internet
Platform 1 –
Mainframe to
Client/Server

6

Source: US Government Data


Business Productivity – The Next Wave
•

•

•

Source: 2013 IDC Vertical View Survey, n=3,700
7


Process productivity – at least half of all
corporate standard processes will have automated
data acquisition. At least a quarter will have selfcorrection capabilities. On board service revenue
will become at least 5% of total industry revenue.
Ecosystem productivity – companies should
add 200 basis points of profitability by eliminating
coordination waste in their ecosystem.
Management productivity – companies should
be able to double their revenue without adding
any net new management personnel.

The Third Productivity Platform

Trillions

Social
Big Data/
Business
Analytics
Cloud
Mobile
Broadband, Devices Services
& Apps

of “Things”

Billions

of Apps

2011

of Users

Millions

LAN/ ClientInternet
Server

Hundreds of Millions

PC

of Users

Tens of Thousands

1986

of Apps

Millions
8


Thousands

of Users

of Apps

Five Critical Capabilities Enabled by the
3rd Platform
•

The 3rd Platform creates the underpinnings for business process transformation…and in
some cases, business model transformation

•

Businesses will be able to transform:



How they innovate



Their resiliency



9

The speed at which they deliver their products and services



•

How they engage with customers

The reliability of their operations

With such high stakes, the business is increasingly taking a front seat in
technology initiatives


Resilient Supply Chains
Resilient Systems –
“The ability to adapt to changing circumstances
while maintaining a central purpose”
 Simple at the core, diverse at the edges
 Tight feedback mechanisms.
 Ability to marshal resources (swarm)

DISORDER Alignment with
only the closest neighbors
produces … nothing but a
disordered swarm..
10


TORUS Raise the alignment
and the chaotic swarm swirls
into a doughnut shape called
a torus

FLOCK Maximize alignment
across the flock and the torus
shifts; everyone travels in the
same direction

The Resilient Supply Chain

•

Improved inventory
management and supply chain
visibility require closer ties to
direct procurement efforts

•

Companies leverage big
data insights to drive greater
efficiencies throughout
closed-loop product cycle
© 2013 IDC Manufacturing Insights

11


Resilient Supply Chain and Collaborative
Commerce Networks
Value of
Transformation

3D
Supply
Chains

Resilient SC
Strategic Partner
Management

Digitally Executed

Data Driven

Collaborative Commerce
Networks

Optimized Customer
Experience

Integrated Planning

Demand Oriented
Segmentation

© 2013 IDC Manufacturing Insights

Now
12


5 Year Horizon

From Our 2014 Manufacturing Commerce Predictions

#4: Direct procurement becomes a key
strategic skill for brand owners

•
•

13

Brand owners seek to manage vendors,
contracts, and services more holistically
Key suppliers are engaged during
innovation and product
development stages


Buy Now!

Direct Procurement: A Delicate Balance

•
•
•
•
•

14

Drivers
Reduce costs
Increase automation
Control spend
Increase revenues
Respond to market
opportunities


Risks

•
•
•
•

Supply volatility
Compliance
Requirements
Supplier Reliability
Global supply base

Sourcing Success: Procurement and
Finance Work Together
PLAN

Product
Design Input

Demand
Input

Source: IDC Manufacturing Insights, 2014
15


PLAN

PLAN

PLAN

Make/Build

Deliver

Assessing Risk in Direct Materials
•

•

•
•

Strategic Items – High profit
impact, high supply risk, high
sourcing difficulty, long-term
contracts, executive visibility
Leverage Items – High profit
impact, low supply risk, medium
level visibility, focus on price
competitiveness
Bottleneck Items – Low profit
impact, high supply risk, high
sourcing difficulty
Non-critical Items – Low profit
impact, low supply risk, low sourcing
difficulty, low level visibility,
transaction focused
Source: Kraljic’s Portfolio Matrix

16


Risk Mitigation in Direct Materials
•

•

•
•

Strategic Items – Give most
attention; cultivate supplier
relationships; apply strategic
sourcing/analytics;
contingency planning
Leverage Items – Spend
aggregation, flexibility to substitute
suppliers/products, place
high-volume orders
Bottleneck Items – Stock-up when
item is available, seek alternative
sources, find ways to control vendor
Non-critical Items – Automate as
much of this spend as possible

17


Using Technology to Mitigate Risk
•
•
•

•

E-procurement and catalog management
help manage non-critical items
E-sourcing and Category Management
are key tools for leverage items
Strategic Sourcing Tools are appropriate
for effectively managing strategic items
Supplier Management is a focal point for
bottleneck items

eSourcing
Category
Management

eProcurement
Catalog
Management

18


Strategic
Sourcing
Tools

Supplier
Management

Essential Guidance
•
•
•
•

19

While tempting to extract every last drop of cost from the procurement process,
with direct materials risk mitigation and sustainable supply become more critical
focus areas
Use tools like e-procurement and catalog management where possible to drive
efficiencies through automation – especially in areas of low strategic value
Tools like Supplier Management can also provide supplier transparency, a key
capability for resilient supply chains
Don’t forget to properly analyze the risks and rewards associated with each lever
you move in your source-to-pay process


IDC’s Core Value Proposition


50 years of experience in the technology market
intelligence business




Rigorous research methodology standards



Unparalleled market and technology segmentation



Fact-based analyst insights and actionable advice




Unique vertical industry focus and research



20

Largest global network of expert analysts

Strong customer relationship focus

IDC’s IT Executive Programs
IDC's IT Executive Programs consists of a family of research programs intended to help today's time-constrained
technology professionals and influencers make more effective technology decisions.
The program offers actionable and timely fact-based research that will assist technology professionals and influencers
in mitigating technology risks, maximizing the effectiveness of IT investments, identifying and capitalizing on new
opportunities, and creating solutions that are aligned with your organization's business objectives.
Our IDC IT Executive Program offers you:
Technical expertise matched
to line of business challenges

A dedicated CIO Advisor

Peer access through the
CIO Executive Council

Open access to all IT professional
events & web conferences

21

Personalized analyst access

Personal dedicated
analyst account manager


Thank you!


Have you joined our IDC Insights Community?
http://idc-insights-community.com
It’s Free!
Features Include:
– Analyst Blogs and Videos
– Discussion Forums
– Resource Library/Complimentary Research
– Networking – Invite, Find and Interact with
Analysts and Other Members
– Polls
– Events Calendar

Heather Ashton
Research Manager, IDC Manufacturing Insights
hashton@idc.com
@HeatherAsh_IDC
22


Direct Materials e-Sourcing at
Illinois Tool Works (ITW)
Colleen Rowley, Program Manager, e-Sourcing, ITW

#AribaLIVE
@ariba

ITW at a Glance

•

•
•

•
24

Illinois Tool Works Inc. (NYSE: ITW) is a Fortune 200 company with
100 years of history
We are a multinational manufacturer of a diversified range of
industrial products and equipment with operations in 58 countries.
Key 2012 financial metrics:
USD $ 18+ billion in revenue
USD $ 2.8 billion in operating income
We are proud of our broad portfolio of nearly 12,000 active patents.


ITW Business Segments

Segment

% of ’13F
Revenues

25

Automotive
OEM

Test &
Measurement
and Electronics

Food
Equipment

Polymers &
Fluids

Welding

Construction
Products

Specialty
Products

~17%

~15%

~15%

~14%

~13%

~12%

~14%


ITW Primary Brands
Test & Measurement and Electronics
Automotive OEM
Polymers & Fluids
Food Equipment
Construction Products
Welding

Specialty Products

26


Strategic Sourcing at ITW


Embed sourcing as a key capability

Sourcing teams in place



Ahead of year one targets



27

Reduce costs



Progress




Objectives

Leverage global sourcing spend

Steady flow of projects at segment and commodity level


Ariba Sourcing

Ariba Resource Review

New supplier identification.
ITW creates posting based on business need.
Have ability to hide ITW company name.

•
•
•

NOT a Supplier Research Tool.
Suppliers self select based on opportunity presented.
Ariba considers 3 to 7 supplier responses per posting as
robust & a practical expectation.

•

Ariba Exchange
28

Ability to create and manage RFIs, RFPs, Auctions.
Analysis and scenario building.
Sourcing Library – repository of questions & templates.

•
•

Ariba Discovery

•
•
•

Community where ITW and other users can share and
trade information.
Community groups where companies with similar objectives
can discuss process and results (for example, Direct
Materials sourcing or Feature Enhancement groups).

•


e-Sourcing Team Reach

29


Project Kick-off
•

•

30

The checklist helps
guide project development
and provides teams a
general timeframe
It reviews all project
aspects from team
development through
project wrap up and
lessons learned

Direct Material Project Characteristics

•

Typically a large number of suppliers (100+)
Requires multiple Ariba events

•

Typically a large number of lots or items (1,000+)
Potentially larger than the lot limitation

•

Use of Custom Offline Bid Sheets
Be careful about formula errors

31


Bid Sample – Excel (Sheet 1 of 5)

32



33



34



35



Supplier responds to price request with breakdown

36


Building Scenarios

37


RFP Analytical Capabilities (1/2)

38


RFP Analytical Capabilities (2/2)

39


Lessons Learned
•

Supplier Communication is Key
For example:
–
–
–

•

Invited 36 suppliers to a chemical bid
25 of the 36 never logged into the system!
Project teams need to engage suppliers – e-mails may end up in spam filter or simply forgotten

Ariba Sourcing Pro Can Save Time
For examples:
–
–
–

Data validation
Compilation of Data
Ability to Run Analysis/Optimization (when baseline data is provided)

•
•
40

Make the Project Scope Manageable
End of Project Surveys

Work within the limits of the tool to be successful

Understand the pros/cons of the bid event and where we can improve


Lessons Learned: Supplier Training

41


Lessons Learned: FAQs

42


Lessons Learned: Supplier Participation

Challenges

•

Supplier Confusion
Ariba Profile % questions causes supplier concern
Confusion with Lot Selection
Custom Download vs. Checkbox Online
– Multiple Download Buttons (have created an ER/SR)
–

•
•
44

Reporting Data
Event Size Constraints

General Ariba Reporting
Lots, Supplier Count, Question Count


Summary - Wrap Up

Balance Cost Reductions with
Risk Mitigation

Build Collaborative Relationships with
Suppliers for maximum impact

Leverage Business
Networks to provide
transparency

ACCELERATE SAVINGS, IMPROVE COMPLIANCE & MITIGATE RISK!

Thank you

Q&
A

Contact information:
Sundar Kamakshisundaram
Sr. Director – Global Solutions Marketing
E: sundar.kamak@sap.com
46


Direct Materials Sourcing and Procurement Strategies – Accelerating Savings and Improving Risk Mitigation

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Direct Materials Sourcing and Procurement Strategies – Accelerating Savings and Improving Risk Mitigation