Strategic Supplier Relationships New Strategies for Changing Times

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Strategic Supplier RelationshipsNew Strategies
for Changing Times
ISM Chemical Group Las Vegas, Nevada 2006
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Agenda

• Background
• Trends in Strategic Supplier Relationships
• Characteristics of Strategic Supplier
  Relationships
• Selection Criteria
• New Approaches for Strategic Supplier
  Relationships
• Real-Life Management of Strategic Relationships
• How This is Different From Other Approaches
• Challenges
• QA

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Introduction
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About Denali Consulting and SupplyStaff

• Supply Chain Staff Augmentation and Search /
  Recruiting
• Typical positions include
• Sourcing Logistics Analysts
• Sourcing Logistics Managers
• Supply Chain Directors V.P.s
• Offer temp-to-perm conversions at no extra cost
  after 6 months
• Since Supply Chain Management is our only focus,
  we are experts at finding the best talent for
  todays Supply Chain organizations
• Provide payroll, benefits, HR services for all
  resources

• Management consultancy, formed in 1996
• Focus is exclusively in Supply Chain Management
  consulting
• Primary industries include service based and
  capital-intensive clients
• Electric Gas Utilities
• Financial Institutions
• Oil Gas
• Mining
• Services include
• Strategic Sourcing Procurement Improvement
• Logistics Optimization
• Supply Chain Strategy Assessment
• Organizational Development Design

Denali Consulting and Supply Staff are certified
as woman-owned businesses by WBENC
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Sample of client engagements that are used to
create the basis of this presentation
Lucas Aerospace
 
 
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Denali Commodity Expertise Across Many Commodity
/ Service Categories
Partial Listing of Commodities Services Sourced
by Denali

• Transformers
• Build-Up Trucks
• Wire Cable
• Chemicals
• Gases
• Facility Design Construction
• Vegetation Management/Line Clearing
• Meters
• Janitorial Services
• Turbines Generators
• Automated Metering
• MRO
• Plant and Facility Maintenance
• Travel Related Services
• Computers Desktop Services
• Benefits Management
• Pipeline Maintenance
• Injection Molded Parts
• Pole Replacement

• Castings
• Drug Alcohol Testing
• Fuel Lubricants
• Drilling Equipment
• Rotors
• Motors Generators
• Supplemental Personnel
• Boilers
• Switchgear
• Line Hardware
• Application Development Services
• Engineering Services
• Office Products Furniture
• Printing Reproduction Services
• Freight Logistics
• Underground Construction
• Packaging
• Circuit Breakers
• Construction Services

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Background
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What Is A Strategic Supplier Relationship?
Strategic Supplier Relationships Definition
A supply strategy based upon joint opportunities,
mutual trust, respect and open honest
communication between the supplier and the
customer. This strategy is focused on reducing
related supply chain costs and improves the
quality of goods and services.
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Once Again a Procurement Best Practice
Beginning of Volatile Commodities Markets
High
Emergence of eSourcing tools eMarketplaces
Introduction of Strategic Sourcing Strategic
Alliances
Industry Consolidation Waves
Perceived Importance of Strategic Supplier
Relationships
Low
1990 1995 2000 2005
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Why are Strategic Supplier Relationships More
Important Now Than Ever?

• Volatile Markets
• Price-focused sourcing strategies dont work in
  periods of increasing commodity prices
• More sophisticated relationship-based approaches
  are required to meet utility cost reduction
  targets
• Based on recent increases in raw material,
  especially fuel, traditional unit based savings
  will not generate substantial savings, suppliers
  must be willing to provide creative solutions to
  remove costs from how they service or re-engineer
  the procured materials
• Merger Acquisition Trends
• Larger, national/global presences of utilities
  require more strategic supplier relationships to
  support growth and cost synergy targets
• Expansion of Supplier Value-Added Services
• Suppliers continue to expand their value-added
  services offerings, increasing the value of
  strategic supplier relationships
• Outsourcing

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Strategic Relationship Characteristics

• Buying Considerations
• Trust is a major issue
• Cross-functional involvement
• Highly resource intensive
• Long range planning required

• Types of Goods Services
• High Spend
• Critical business implications
• Custom engineered
• Limited availability or alternatives

e.g. Line Construction Services, Transformers
Competitive Advantage Driven

• Supplier Relations
• Longer Term Agreements
• Total interaction
• Close working relationship
• Aligned objectives and philosophy

Teamwork
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Strategic Relationship Criteria
Potential for impact
STRATEGIC RELATIONSHIPS
Common values
COMPLEXITY/IMPACT
Aligned goals
Proper environment
VALUE / COST
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Elements Of Successful Supplier Relationships
Six critical elements support the development of
successful relationships with Key
Suppliers Focus A common vision for the
relationship, with agreed strategies and
activities Trust Open communication and
disclosure of business drivers Performance Con
tinuous improvement towards agreed targets
and KPIs People Clearly defined roles and
responsibilities Proactive Anticipating
business needs and providing creative
solutions Profit at Risk Establishing real
metrics to drive behaviour for both parties
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Focus
A common vision for the relationship, with agreed
strategies and activities

• A Team of representatives from the Buying Company
  and the Supplier jointly
• develop a Business Plan for the Relationship,
  addressing
• Vision and Mission
• Drivers and Values
• Breakthrough Strategies
• Continuous Improvement Strategies
• Key Activities for the Period of the Plan
• Key Measures of Success

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Trust
Open communication and disclosure of business
drivers

• Development of Total Cost of Ownership Model to
  understand our joint supply chain costs
• Open Book arrangement for Contract Cost Drivers
  and required margins
• More use of incentives to create business drivers
  for suppliers to provide RD supportfor cost
  savings or driving new revenue avenues

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Performance
Continuous improvement towards agreed goals

• Establish Continuous Improvement Program to
• Generate and document opportunities for value
• adding and process improvement
• Implement ideas
• Document benefits achieved
• Develop KPIs to quantify progress against
• Key Measure of Success identified in the
• Business Plan
• Customer specific measures
• Jointly review progress on a regular basis

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Sample KPI Scorecard
Example
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People
Clearly defined roles and responsibilities
Customer Category Manager/Lead Buyer Manages the
performance of the contract and supplier across
the organization Customer Representative Responsi
ble for the application of contract to a specific
customer group Supplier Development
Team Representatives of major customer groups who
the determine strategy for the category and
monitor supplier performance against KPIs
Supplier Account Manager Responsible for
provision of goods or services under Terms of
Contract/Agreement. Customer Contract Manager
and decision maker. Operations
Manager Responsible for the application of
contract and improvement program, working
directly with the customer
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Proactive
Customer Supplier Quick responsiveness in
sharing ideas Risk taking behaviour rewarded
and encouraged New ideas move through system of
approval on fast track
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Profit at Risk
Bottom-Line Impact Performance to agreed upon
targets is expected-not rewarded Insist that
suppliers proactively know their market for raw
materials, technological advances, industry best
practices
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New Approaches to Strategic Supplier Relationships
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Typical Supplier Development Process
Contract Start-up
Planning and Implementation
Supplier Relationship Management
Contract and Performance Management
Value Discovery
Review and Define Category Strategy
Develop Detailed Transition Plan
Develop Communication Approach
Conduct Internal and External Assessment
Manage Contract and Supplier Performance
Develop Supplier Relationships
Conduct Implementation
Perform Relationship Check-Ups
Manage Contract Variations
Develop Options and Recommendations
Manage Stakeholder Communications
Plan Competitiveness Assessment
Review Category Performance
Obtain Stakeholder Approval
Manage Contract End
Create Total Cost Model (if not already in
place)
Conduct Value Analysis Workshop (s)
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Whats New With Strategic Supplier Relationships

• New approaches are being required to deal with
  new environmental factors in the supply chain

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Volatile Markets Require Greater Cost Modelling
Sophistication

• Volatile markets are tough for both customers and
  suppliers.
• Unless cost transparency is achieved in the
  relationship and pricing structure, larger
  contingencies will be built into prices.
• Working closely with your core strategic
  suppliers is the best means to continue realizing
  ongoing savings through volatile markets.
• Understand how to approach suppliers price
  increase requests critically but fairly. Share
  cost increases with suppliers who do a good job
  of managing their cost by collaboratively working
  with their suppliers and demonstrating good
  supply chain management.
• Better understand the costs of your purchases and
  what market forces are effecting them. In times
  of volatile markets, its more important than
  ever to have an in-depth understanding of
  supplier cost structures and total supply chain
  costs.
• Proactively work to ensure that the pricing
  structure of your contracts are appropriately
  motivating suppliers to decrease cost while
  maintaining or increasing quality and service.

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Total Cost of Ownership

• The present value of all costs associated with a
  product, service, or capital equipment that are
  incurred throughout the supply chain.
• Typically these are broken into 4 categories
• Purchase price
• Acquisition costs
• Usage costs
• End of life costs

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Where do we get the benefits?
Across a Companys boundaries
PurchasePrice Procurement Practices
Supplier Best Practices Leverage Supplier RD
Leverage Specifications Inventory
Practices Service Measures tracking Transactional
Process Remnant/Obsolete Practices
Perceived Opportunity
Actual Opportunity
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Total ownership costing of the supply chain
Cradle to Grave Costing
Analysis of the supply chain is done using a
concept called Activity Based Costing
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Example of Total Cost Comparisons
Example
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Strategic Supplier Relationships in MA
Environment

• As companies continue to consolidate, strategic
  supplier relationships can play a critical role
  to support growth and cost management targets

(Hot issue - Maintaining supplier diversity
goals, while consolidating the supply base)
Supply chain synergies are often key elements of
MA business cases
Broader territories will require stronger, more
strategic relationships
Strategic suppliers can be key members of an MA
joint team
Sophisticated cost modelling is required to
understand customer and supplier cost savings in
an MA environment
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Broader Supplier Offerings and Strategic Supplier
Relationships

• The more value added services provided by a
  supplier, the more strategic the relationship
• Typical Offerings Broader Offerings
• As companies continue with the trend toward
  increased variable costs outsourcing, strategic
  supplier relationships, along with broader
  offerings will become the norm

• Business process outsourcing
• Full assembly or category vs. component sourcing
• Combination of products and installation

• Supplier Managed Inventory
• Product training
• Warranty utilization
• Kitting

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Strategic Supplier Relationships In Action
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Why Should Strategic Relationships Be Important
to You?

• Continuity of Supply - Especially During Tough or
  Volatile Times
• A Single, Unbroken Supply Chain - From the
  Supplier Through to the Customer
• Continual Dialogue - When Costs Go Upand Down
• Cost Performance Below Market Indices

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Continuity of Supply

• Strategic Supplier Relationships help to ensure
  continuity of supply for strategic material and
  service categories. This is especially important
• During tough times (e.g. the California utility
  financial crisis)
• During periods of tight supply conditions
• When markets are volatile
• To ensure alignment with strategic priorities

Edison Stays in Financial Limbo as Lawmakers
Debate Rescue Plans Energy CFO of utility's
parent worries that creditors may force
bankruptcy if action is stalled in Legislature
Raw Material Prices Rising What Does This Mean
to Energy Consumers?
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The Single, Unbroken Supply Chain
The Single Customer/Supplier Supply Chain
ID NEED PROCUREMENT RECEIVING
DISTRIBUTION MAINTENANCE DISPOSAL
SELL RECEIVE ORDER SCHEDULE/PLAN
MANUFACTURE SHIP PAYMENT

• Supply Chain should be one single, unbroken chain
  from the suppliers processes through the
  customers
• Buyers must have the same expectations from
  themselves and their companies as they have of
  their suppliers
• One weak link can disrupt the entire supply chain

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Examples of Strategic Relationships in Action

• 36M contract awarded based on Total Cost of
  Ownership in 1994, delivered originally 34
  savings.
• Years 1994-2005, delivered an additional 12 TCO
  savings
• 2006 awarded 5th 3 year extension with 3 annual
  TCO goals included in the contract
• While facing bankruptcy, only 1 of the 24
  Strategic Suppliers to a 1.8B spend base changed
  terms or delivery options
• When one Strategic Supplier faced pending
  bankruptcy, their major customer pre-paid their
  orders to help them with cash flow
• When faced with escalating prices in raw
  materials, one Strategic Supplier worked with
  their major customers to secure 1 year of
  material on their behalf without confirmed orders

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The Importance of Continual Dialogue

• Must have continual dialogue with suppliers - not
  just when prices go up
• Continuous improvement to reduce total supply
  chain costs is expected
• Must be willing to look at costs and process for
  both the buying company as well as the supplier
• Strategic Relationships cant be thought of as

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The Expectation of Better Than Market
Performance

• Strategic Supplier Relationships should deliver
  performance that is better than market
• Cost trends should be below market indices
• Pricing volatility should be passed onto those
  customers that buy marginal capacity, not those
  who have firm, long term commitments
• This applies to quality, service and total cost
  performance

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Why Strategic Supplier Relationships are
Important

• A new supplier commences operations every minute
• A supplier files bankruptcy every 8 minutes
• A supplier ceases operations every 3 minutes
• A judgment is filed against a supplier every 14
  seconds
• A supplier name change happens every 2 minutes
• A supplier ownership change happens every 4 hours
• A suppliers risk profile changes every minute
• world of constant change and challenges
  (opportunities)

Source Dun and Bradstreet
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QA
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For Further Information

• Please contact
• Dawn Tiura
• President
• Denali Consulting
• dtiura_at_denaliusa.com
• 530-448-0000 cell
• 530-550-5213 office
• www.denaliusa.com
• www.supplystaff.com