Welcome to the second course in global procurement and sourcing specialization. This is going to be on strategic sourcing and I think it's one of the most important topics that we teach in procurement. It consists of a 7-step strategic sourcing process and it was developed by AT Kearney, I think in the 80s. Many people have taken this and adapted it to their own needs and a four step or five step. But the once I've looked at it they basically cover the same topics underneath each one of the steps just in a slightly different way or order. So what I would say is that this particular thing has been used when we were at Colgate. I used a similar thing in Mars, it really has stood the test of time. And the bottom line for me on this is if you file this process it works. So with that, let's get started. First as I said, I always do I'll do the course expectations for you or these are your learning objectives. The next three weeks, we're going to basically learn and understand the various steps in this proven 7-step Strategic Sourcing Process. Hopefully when you're done with it, you'll be able to discuss why it's important for the procurement department. But more important for those stakeholders we talked about in the current basics, and you'll find that if you follow this, you will be successful. So let's go ahead and get started. So we divide it into three weeks, we're going to go a deep dive into somewhere between two and three of the individual steps. So let's get started. So this question I always put at the beginning of each one of the courses or sometimes in later on in the courses, but here's a question for you. Why do we want to strategically source? Period, why do we want to strategically source? I'll give you about 30 seconds, just jot it down on a piece of paper and I'll be back to you in 30. Okay, well you want to create shareholder value. And the first way you can do that is you want to be able to decrease cost. We've talked about this in the basics about in a recent survey of chief criminal officers 79% of them said that's the most important objective for them. So we've talked a little bit about that when we talked about the importance of procurement, but certainly reducing cost is included almost in every procurement. But also we talked about maybe increasing revenues, increasing volume other than cost. We talked about maybe bringing supplier innovation in, maybe better quality such that the better quality produces a better finished product that you can sell more. Maybe you need to enter new markets and you have to support that endeavor. We referenced in procurement basics the need for speed to market, maybe we can bring something in earlier such that the marketing people then can launch it earlier and increase sales. So I think the point here is that it's a dual type of reasoning strategically sourced, both to decrease cost and increase revenues. So this is the seven-steps to teaching sourcing process that we're going to use. First, I think before we get into it, you might ask, well do you use this for everything? Well no, I think this, you're going to see this is a very involved process and takes a lot of work. What I would say is that any large item either material director or indirect services, strategic item, critical item to your business, a large tactical item like maintenance repair and operating items those types of things. You would use this strategic sourcing process. Yes, if it's a small item, you get a requisition. You find a local source and you would probably just order it, and you wouldn't spend a lot of time. But for for the very large expensive complicated categories, commodities, this is the process you should use. So I'm just going to briefly go through these and then we're going to jump in to the first two in this week. I'm going to profile the category. We'll talk about each one of these individually. You're going to develop category sourcing strategies. You're going to generate supplier profiles. You're going to choose a competitive method for you moving forward a strategy source so to speak. You're going to select the supplier negotiate and get the contract in place. And then you can have some sort of continuous improvement, sometimes called supplier relationship management program on a continuous basis to evaluate the supplier that you have chosen. Underneath this, you'll see the prepare to source or stakeholder outreach, it's very important to be successful both your company yourself and your stakeholders, involving them in all of these seven-steps. So let's go ahead and get started. The first one, you want to profile the category. So if you're not familiar with it, you want to go talk to your stakeholders or talk to the people that maybe have managed these things before. You wanted to find basically what's in and out of the category, right? You'll get an inkling of what the sourcing strategy might be. We're going to review that in the next step also, but you start to think about it. You're going to do some sort of a market analysis that we're going to talk more about in course five. And try to explore what it's in this category going on, and your deliverable here would be to complete a category profile. So what I'm going to do in this particular course is I'm going to use an example for all seven of these steps so you can get a pretty good feel for how it works. And I've chosen printed material, and it'ss something we talked about in procurement basics. But basically printed material in the company thing is printed on a piece of paper. A lot of the printed material in the case of Colgate was in the marketing department. So let's just use the example. So profile the category, we'll use printed materials. You got to decide what's in and what's out. We've talked a lot before about a lot of printed material and marketing, but there's also printed material and sales. There are some printed material in human resources and benefit areas, supply chain has printed materials. So you have to determine what in or out of the category. In our case, we looked at very broadly at all categories. You then would analyze the spend through your systems form a total company's perspective. Assess any industry dynamics in particular. You can learn about who the suppliers are in this mix. And maybe as you're talking to various people, there might be some new suppliers that you might want to consider. And lastly, is there any technology driven solutions and we did find something when we did our research. And a lot of people using kind of an online tool to be able to put orders in and get quotations back, so we'll talk about that a little bit later. The second one is you want to do a deep category sourcing strategy. And you're going to want to basically try to understand, where's the buying power in this particular category critical to being successful? And you want to determine some sort of sourcing approach that maximizes savings and value. And again, you're going to review kind of the sourcing strategy for the first couple of buckets because you're kind of honing that strategy into a final decision. Final decision, we'll going to have initial sourcing strategy. So let me give you some tools you can use to be able to do that. The first one is portfolio analysis, and I'm going to show you in a minute what that looks like. But basically there, you looked at critical suppliers, routine suppliers, leverage, and bottleneck. And we're going to go through each one of these and give you examples. So this is called portfolio analysis. So if you're looking at your category, you might want to try to figure out where does your carrot category fit in each one of these two by twos? And you can see here on the left is complexity or risk, on the bottom is value. So if it's low low, it's kind of a routine item, I'm going to give you examples of each here. If it's a low kind of risk but high value is going to be leveraged. If it's a high high it's going to be strategic, and if it's high risk but low value is going to be a bottleneck. So let me give you an example in each one of these. First of all, I should tell you that this is also if you're familiar with it, it had been around for criminal, it's also called the Kraljic Matrix. It's been around since the 80s, we happen to use the word portfolio analysis when I was at Colgate and that's what I'm using here. So let's take some examples so you understand it. So let's assume that you're looking at office supplies as a category. Well office supplies individually very small items, but it adds up to quite a bit of money each year, pretty low value in general. You want to make it easy and efficient and be able people to order that particular category. You probably put an app on your phone or maybe app on your computer or people can order pencils and pens, and have it delivered to their desk or wherever they need it. You probably want to be able to put a three year contract in place not to worry about it. And maybe take an evaluation every couple of years, very routine type of item. Leverage on the other hand is very high in value, on a low-risk. Commodities can't fit this particular area, I mentioned palm oil is one. It's a commodity has a common specification. It's not really complex. You can order from any one of multiple suppliers, fire one, two, three, four, five six, it doesn't make any difference. We had Colgate used to use an e-auction just to get the best price. This particular portfolio is really about price. You have an excellent spec, it doesn't change and all you want to do is get the best price that you can. Strategic, this is one probably small number of suppliers 5 to 10% of your suppliers. Maybe a large part of the expenditure but a relatively small number of suppliers. This is where you really want to create value, you want to create partnerships. If you have familiar with that term in this area. An example for us was Fragrance and Flavors. So one time, we had 80 suppliers in Fragrances and Flavors. We did a complete strategic sourcing analysis and went from 80 to 2. And these two suppliers had all the business, but on the same token, we asked them to help bring an innovative ideas to help grow our top line. We put in crossfunctional teams between the two companies that would work on like cost reduction. We gave them a goal of 3% per year. We'd have cross management meetings between the supplier and Colgate, determine what's working and not working, and how can we improve? The CEO of our company used to meet with their CEOs on a quarterly basis to make sure everything was very strategic. We would literally have open book costings and be able to try to reduce costs with it, so very, very strategic. And lastly bottleneck, this is kind of one of those risky ones. You have one supplier and only one, and basically this is an example would be Triclosan. It's no longer used in toothpaste, but it was at one time. We have one supplier, quite frankly, what you want to do in this particular one is you want to carry inventory. Because if that one supplier has a problem, it can't deliver, you're going to need it. Otherwise your product, your toothpaste is going to go down, and you probably want to take them out to lunch jokingly. You want to develop a very strong relationship with them because you want to make sure that you need them, they want to make sure that they give you what you need. Obviously over time in addition to carrying inventory, you want to try to develop potentially a second source that can change the whole relationship. So that's a bottleneck. So I think this is a type of thing that if you know your category that you're analyzing, you can have a strategy. So we call this portfolio analysis. And printed material where do you think printed material based on what we've told you so far fall in this portfolio analysis? Yeah, it's leveraged. We already told you there's lots of suppliers, we had about a 170, I think in Colgate at the time. It's price oriented, all you got to do is basically, you got the power and just need to select the right suppliers for your long-term base. Second one [COUGH] is 5 forces methodology and sometimes called Porter's five forces. It's taught in MBA schools on a regular basis, many times in business strategy courses. And it basically it's used many times to evaluate customers or acquisitions or mergers, those types of things. And we've flipped it here to look at procurement, and it works very well. So what you're trying to do is try to understand from a category standpoint really what's really important in this market upstream and new entrants and substitutes. So first, we talk about the the suppliers and I'll try to use print as an example as we walk through it, right? But basically, there's a lot of suppliers in print materials. So they don't have a lot of power and basically it's a very price oriented deal. New entrance, not in this particular case, but in some cases if it's something made in China. Maybe there's new people coming in and we might want to consider looking them as for potential sources on a global basis. Bargaining power of suppliers, are there a lot of suppliers out there. Do you have a lot of volume that you can give them? So how much power do you have? Are there substitutes? Well in printed material there is, there is the power of using the Internet not printing as much paper and maybe saving a few trees. And basically you want to take all this information and say, what's the overall supply market competition here for whatever category you're looking at? Before we jump into the printed material example, what I should tell you is that we're going to go through this much deeper when we review supply market analysis. So we'll probably spend more time there. So let's come back to printed material. We did a portfolio analysis, we said it's a leverage diagram, very price sensitive, lots of suppliers. We have the power, so we knew that. The five forces said that we have the bargaining power, there's lots of suppliers. Pretty easy for new people to enter the market etc, etc, so we got that. We did learn though through these analysis that there was maybe something we should consider using a web-based design and sourcing tool that we found about that we didn't know about. So that was something new and we put that in our category, strategic sourcing. So we have reviewed the first two, profiling the category, generate category sourcing strategy. Hopefully, we involve their stakeholders here, and we'd be able to run into the next few steps. So with that, we're going to stop here, and I'll see you next week in part two of strategic sourcing.
