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We thought the
name Gunpowder might get your attention. We chose it because of
its explosive and medicinal properties. Medicinal you might
ask? Gunpowder is a green tea whose leaves are rolled into pellets.
If you believe in Chinese medicine, it can prolong life, reduce
the risk of cancer and lower cholesterol. With this newsletter we
hope to share some pellets of information if you will, to help organizations
heal themselves of rising cost structures by reducing their direct
material costs. As for explosive, we promise no marketing or sales
pitch—just hard-hitting examples, case studies, articles on
procurement trends, interviews with industry experts on cost reduction
topics and a mailbag (we’ll even print your negative letters).
Your thoughts and ideas on topics are of course, welcome. You can
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a different opinion.
|In this launch edition of Gunpowder, our editor,
Lisa Reisman tackles pinning down negotiation
strategies in tight commodity markets…if steel prices have
you down, Lisa offers a few strategies. From our UK desk, Stuart Burns
offers his advice for taking that offshore
sourcing plunge. Finally, we conducted a brief interview with
Jason Busch, formerly of FreeMarkets, on technologies
that matter to the small and mid sized firm!
in Tight Commodity Markets
There is nothing more
annoying to any business executive than to feel as though there
is no leverage to be had with one’s suppliers!
In reality, in tight commodity
markets there are a range of tactics that small and mid sized businesses
can deploy for either cost avoidance or overall cost reduction.
But companies often do not understand that the very nuances between
the products and materials that they are purchasing lead to very
different negotiation strategies.
Let’s step back and examine three primary
the word suggests, this strategy dictates a closer relationship,
particularly when the product must meet critical delivery schedules,
or when a supply market for the particular part or commodity can
be considered monopolistic. Partnering involves “opening the
books” and working together to identify areas for total supply
chain cost reduction.
Bid via auction—This
is what it sounds like but auction(s) tend to be in reverse; that
is suppliers bid the price of the material or commodity down. This
format tends to work best when there are at least half a dozen suppliers.
Supply markets with over 12 qualified bidders ensure the best results.
One on one negotiation—This
type of negotiation works well when there are a limited number of
suppliers for a particular product or commodity (e.g. not a monopoly
but not enough participants for an auction) or, the dollar amount
of the spend category does not represent enough volume to run an
An example helps to illustrate the different scenarios.
An automotive supplier buys both aluminum sheet and steel stampings.
These both sound quite similar (they are, after all, part of the
same commodity family—metal), but
each requires a different negotiation strategy.
A commodity like aluminum sheet (e.g. 1050 H14 .080
” x 48” x 144“) might be supplied by dozens of
different companies, however, because it is a commodity (or near
commodity), the price range of this product typically falls within
a small band (e.g. it is unlikely that one supplier will be grossly
cheaper than another supplier). The strategy to source this item
is a one on one negotiation with various qualified suppliers. The
advantage achieved by the automotive supplier will involve identifying
a larger number of qualified potential suppliers and comparing pricing,
quality and delivery information.
A steel stamping, though commodity like in nature,
actually is a bit more complex than the aluminum sheet because of
its greater percentage of value-added content (sorry for the hackneyed,
clichéd term, but value-added really refers to something
here—the production process used
to transform the semi-finished material into a stamping). This would
include the stamping process and potentially welding, assembling,
punching or coating. These value-added processes, because of their
higher labor component, provide an opportunity for cost savings
and potentially, a reverse auction. Moreover, there tends to be
dozens of potential suppliers of these types of products. Creating
an online competitive bidding situation often yields better results
than traditional one-on-one negotiation or a partnering strategy.
Typically, categories such as metal parts, electronics
and plastic parts make for good auction candidates. More commodity-like
products such as chemicals, food or steel and raw metals do not
make for good auction candidates.
For companies new to the auction arena, there are
a few risks that should
• Limited control (of supplier behavior)
• Can expose more information about the company or its parts/materials
a broader supply base
• Auctions can upset incumbents
At the same time, using one-on-one negotiation instead
of an auction format also presents several risks.
• It is possible that the “best”
supplier is not part of the process (too few suppliers)
• Potential exists for “the relationship” to influence
award decision—it takes the neutrality
away from the process
While there is no reverse auction panacea to sourcing
in tight commodity markets, companies that take the time to strategically
examine their various spend categories, aggregate spend to increase
volumes, gather supply market knowledge, and implement the right
negotiation strategy stand to reap significant cost savings, even
in tough sourcing environments.
Lisa Reisman is
Managing Director, US Operations, Aptium Global Inc. She can be
reached at 773.525.9750
or by email at firstname.lastname@example.org.
|Crawl, Walk, Run—How Global
Really Get Implemented
Implementing a global
sourcing program might sound unconvincing to manufacturers that
have spent years developing long-term relationships with their domestic
suppliers. Quality, convenience
and reliability are the trademarks of these types of relationships.
To further complicate matters, moving tooling or building new dies,
adding buffer stocks, and establishing foreign currency hedging
is enough to scare off even the boldest of companies.
So how do manufacturers make the move offshore?
Our research and experience suggest that for more
complex goods, the most effective strategies often involve a phased
approach over a longer time period, perhaps even years rather than
moving all sourcing offshore in one step. How does this work in
practice? Let’s examine what a typical phased approach might
look like. For example, consider a Tier 1 automotive firm who is
currently purchasing steel stampings from the domestic market. As
part of the relationship with its customer, the Tier 1 firm is the
“steward” of the tooling, meaning though the tooling
is owned by one of the Big 3 auto manufacturers, the Tier 1 firm
has some say as to where the parts can be produced.
The first phase of the sourcing strategy would involve
primarily domestic suppliers but also introduce a limited number
of low cost country suppliers into the bidding process. During the
contract award process, the Tier 1 firm decides to give the entire
contract award (volume) to a domestic supplier. But as soon as the
first order arrives, the Tier 1 firm begins to identify low cost
country suppliers in SE Asia or Eastern Europe, some of which may
have already been involved in the bidding process during phase one.
At the same time, the Tier 1 firm receives price quotations on the
costs of developing a second set of tooling. The tooling costs for
dies produced in Asia and Eastern Europe are expected to be amortized
and rolled into the piece part price over a two – four year
time span as some supply begins to move offshore. In year two, after
a competitive bidding event, the Asian or Eastern European supplier
receives 25% of total spend while the domestic supplier receives
75% of total spend. In year three, both sources of supply receive
50% of the volume and the Tier 1 firm can decide in years four and
five the proper mix and volumes for each supplier, depending on
the Tier 1’s annual “give-back” to the automotive
From a negotiation standpoint, this strategy works
well when there is more than two million dollars in annual volume.
At one million dollars of annual spend, the volumes are interesting
to both Asian/Eastern European and domestic suppliers. With two
or three million dollars in annual spend, the Tier 2 firm has enough
volume to make the contract attractive enough to both suppliers,
while still maximizing volume discounts.
Though in many situations, buying organizations would
rather rationalize their supply base, reducing the number of suppliers,
in this case, because of the stamping complexity and quality requirements,
it actually makes better sense to fully develop two suppliers. By
following such a program, the Tier 1 firm actually reduces their
supply risk by developing a second source of supply while simultaneously
establishing an early foothold in Asia for possible expansion in
the future, either to identify future sources of supply and manufacturing
or to develop emerging sales opportunities.
Stuart Burns is
Managing Director, Europe and Asia Pacific for Aptium Global Inc.
Stuart can be reached at 44.1329.227.424 or by email at email@example.com.
|Q&A with Jason
Busch on Sourcing Technologies
Jason Busch is Managing Director of Azul Partners,
a consultancy that works with technology vendors and service providers.
He most recently spent 5 years at FreeMarkets, the pioneer in online
auctions and strategic sourcing.
Q: If I am a $25m manufacturer, what is the
one type of sourcing technology
that I should be using?
A: The one type of technology should be an on-line
negotiation tool which includes RFX and reverse auction capability.
Even with limited use, this type of application should more than
pay for itself within a few months. If you are not working with
a service provider who includes this technology as part of their
offering, there are a range of vendors who have developed creative
pricing models for one-time and periodic use.
Q: Should I buy a hosted or behind the firewall
A: There is no reason why any small to medium
sized organization should consider installing software for sourcing
and procurement initially. Hosted applications are typically much
less expensive to get up and running and are cheaper to use and
maintain on an on-going basis.
Q: Who are the leading vendors for the following
types of applications:
a. Auctions and eRFX, b. Data aggregation/spend analysis, c. Supplier
A: For auctions and eRFX – Ariba (FreeMarkets
QS), Procuri, Iasta, and Verticalnet (B2eMarkets) have the strongest
applications. For data aggregation/spend analysis – Ketera,
Ariba, Verticalnet, Zycus and Emptoris are my picks. For supplier
identification, I think this is a weaker application set but Thomas
Register (domestic and global edition), Alibaba.com and FirstIndex
all have solutions. Ariba has service-based solutions acquired from
FreeMarkets, but little is embedded in stand alone technology.
Q: Will sourcing functionality be embedded
in mid-market ERP applications?
A: Eventually, yes. In their mid-market offerings,
SAP has already made some strides to include reverse auction capability,
as has Oracle. Peoplesoft is a bit of a joke (try finding a single
paying reference), but that won’t matter long, will it, if
Larry gets his way … but today in general, even SAP’s
and Oracle’s functionality remains limited at best and inexpensive
hosted providers offer a more capable solution at a lower price
point. In five years, however, I would expect much of this capability
to be included in most leading mid-market ERP packages.
Q: Who do you trust for your advice on these
A: There are a few publications which are worth
reading which are good sources of information—Purchasing Magazine,
Supply & Demand Chain Executive are two that come to mind. I
would also recommend reading Aberdeen’s research as well (www.aberdeen.com)
as much of it is very thorough, detailed and inexpensive or free
to download. The other source to trust is AMR Research (prior to
Pierre Mitchell’s departure) but they charge to read their
reports. Forrester Research, Gartner, and Meta occasionally have
good things to say but are not worth the investment for smaller
organizations, given their current limited coverage of the sector.
Most important, I would not go to a Big 4 firm or any technology
integrator and ask for advice. Many have preferred partnerships
in place and they will steer customers to use these solutions often
in exchange for kickbacks and integration dollars.
Jason Busch is Managing
Director of Azul Partners. Jason can be reached at 773.525.7406
or by email firstname.lastname@example.org.
|This newsletter is published by Aptium
Global Inc. a direct material advisory firm
based in Chicago, IL. With offices in the UK, China, India and a network
of global associates, Aptium Global works with small and medium sized
manufacturing companies to save money on direct material purchases.
Smaller companies face the same cost pressures as the Fortune 500,
yet often lack budgets for cost reduction services. Aptium Global
works with organizations on a pay-as-you-save™ basis, minimizing
impact on cash flow and maximizing impact on the bottom line.
Aptium Global, Inc.
421 W. Melrose
Floor 10, Suite C
Chicago, IL 60657
Phone: 773 525 9750
Fax: 773 525 7496
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Phone: 44 2380 273 671
Fax: 44 1329 227424
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Phone: 91 11 51825101
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