Purchasing Activities

IDRAC - 2012
27/01/2012
IDRAC 2012
January / february 2011
Jean-Christophe TRAN DGA, GIE BPCE Achats

Groupe BPCE
Deputy Chief Executive Officer Group & Head Office Procurement
BPCE Group Profile
http://www.bpce.fr/en BPCE Achats : The group purchasing organization
IDRAC - Procurement Training - 2012 - J-C TRAN
IDRAC - 2012
27/01/2012
--- Contents
Purchasing / Procurement Function & Process
Negotiation
(Fundamentals)
Legal: Incoterms
Purchasing categories (portfolio segmentation)
Price and enquiry
Buying with the Internet : e-procurement
Inventory Management Constraints Risks Strategies Market Knowledge

3
Everything you allways wanted toknow about Purchasing but you never dared to ask
What do we mean by Purchasing in a company ?

Purchasing expense Purchasing function (Procurement) : Buyer, Lead Buyer, Purchasing Director, Purchasing VP
What are the specific skills ?

Technical skills. Behavioral skills. (Project) Management skills.
Are there specific trainings ? What are the specific roles and responsibilities of buyers ?
What they have to do What they shouldnt do
Never choose this job if :

You dont like to work with others, You dont want to travel, Youre disguted with basic finance and math, You dont like to work on different projects at the same time. You dont like challenges. You dont want to negociate.
Is it a well-paid job ? Is it a nice job ? Is there a professional life before and after this job ?
Interesting previous experience
IDRAC - 2012
27/01/2012
The big change in economy (Indicative figures for manufacturing sector) Production driven or regulated economy (protected markets) Selling Price = Cost + Margin
Margin Overheads
Market driven economy or globalized economy (free trade) Cost = Market Price - Margin
Margin Overheads Labour Materials & Subcontracting

Purchasing expenses > 65 % Sales income (Turnover)
Labour
Materials
Purchasing expenses Turnover
= 25 %
Cost reduction and productivity
Competitiveness levers = how to reduce costs ?
External savings : Purchases

Purchasing
Internal savings :
Cost of product
Labour Overheads
Productivity
IDRAC - 2012
27/01/2012
Cost reduction = impact of savings on profitability
Initial situation Turnover Purchasing Bought out expenses

10% saving 25% higher on purchases turnover 1000 450 (-10%) 300 100 150 1250 (+25%) 625 (+50%) 375 (30%) 100 150
1000 500 (50%) 300 (30%) 100 100
Labour Overheads (fixed) Net result
Profitability (Net Result / Turnover)
%
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Overview of PROCUREMENT MANAGEMENT CYCLE

Procurement policy
Strategy
Portfolio analysis / Purchasing Strategy Action plans
Projects
Execution (Operations)
Purchasing Management Procurement IS Management (Databases, ERP, e-tools, )
Supply Management
Steering and controlling
Performance measurement / KPI
IDRAC - 2012
27/01/2012
Procurement Management = Purchasing and Supply Management

Purchasing Management process
Need analysis Sourcing Pre-selection Enquiry (RFQ / RFP) Negotiation Contracting Supplier follow-up / management
Data admin
IDRAC - Procurement Training - 2012- J-C TRAN
SRM
Items Prices Suppliers Intranet PO management and stock/reorder Follow-up, reminder, supply plans, Reception (goods, services) Invoice management
Supply Management process

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2 complementary value chains
The separation between Purchasing and Supply Management value chains is a necessity to make the 2 functions more efficient and professional The Purchasing / Procurement Value Chain answers to the following questions : What need ? Why ? For whom ? From Whom (Which supplier) ? At what price ? What Costs (Total cost) ?
Need analysis Sourcing RFQ/RFP Negotiation Contracting Internal promotion Performance measurement
The Supply Management Value Chain answers to questions : When ? How much ? Where ?
P.R. Approval P. Order creation P. Order dispatch Supplier / Delivery Follow up and Reception Invoice Control
Purchasing Request (Qty, Delivery time, )
* (In small structures the same person sometimes may perform the 2 functions)
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IDRAC - 2012
27/01/2012
The role of purchasing function - fundamentals
The mission of the Buyer : The buyer is an internal service provider

He has to provide value to his internal client and listen to his needs He has to satisfy the right need of the requester - right in the sense of adequate for the company In satisfying the requesters need, he has to make sure that the supplier and the negotiated product and/or services will effectively meet the needs
Quality + Cost + Lead-Times. What has the buyer to offer to his internal clients ?
Knowledge of the supplier market Globalisation of similar expenses to leverage volumes Decentralized and simplified Supply Management, as close as possible to the end users Efficient, professional procedures to organize competition between suppliers in order to :
Save time, Save money (optimize the company financial results) Improve quality level
What the buyers needs and demands from his internal customers (requesters) :
Be involved early in the procurement process : at the stage of the expression of the need
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The Purchasing Function
Involvement of Purchasing as early as possible ! The earlier you intervene (at the initial stage of
definition of the need), the more levers you have at your disposal to optimise the purchase :
Potential savings
Redefine the need of the user in order to make use of standard goods and services Sort out suppliers which are capable of answering the need and stimulate competition Etc.
III Specification of Need
II Negotiation I Supply management
Intervention time of Purchasing
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IDRAC - 2012
27/01/2012
--- Contents
Purchasing / Procurement Function & Process
Negotiation
(Fundamentals)
Legal: Incoterms
Segmentation, Spend analysis, Needs analysis
Price and enquiry
Buying with the Internet : e-procurement
Inventory Management Constraints Risks Strategies Market Knowledge

13
The role of purchasing
The purchasing process will be adapted depending on the nature of the purchased goods
Different situations : examples
power differentiel (offer vs demand), simple need vs complex need, standard product (off the shelf) vs specific service or solution.
Differentiated techniques : examples

bargaining vs complex negotiation,
spot buying vs long term commitment / partnership, Exclusive agreement vs co-buying.
Thus, it is necessary to organize the purchasing portfolio into Purchase Families :

to be able to use the right process for each purchase family to differentiate the practices according to the nature of purchase to define purchase families which are homogeneous on the market To identify the suppliers for a family, to optimize the supply base for each family.
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IDRAC - 2012
27/01/2012
Purchasing category definition
A purchasing category is defined by
A similar type of needs

- internal expertise - specification - consumption
A unique supplier Market

(or similar in term of structure)
- Same suppliers - Same characteristics (oligopoly, monopoly)

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Squence 3 : Le processus achats
Example of purchasing segmentation

(Aluminum Producer)
10 purchasing families / 164 segments

Ex : segment 140 : office equipment
A. General expenses
Ex : segment 180 : IT services Ex : segment 330 : hardware Ex : segment 355 : pumps Ex : segment 727 : specific metallurgy process equipment
B. Consumables C. Industrial supplies

and equipment
D. Industrial services
Ex : segment 740 : Winding and engine repair
E. Energy
Ex : segment 890 : energy
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IDRAC - 2012
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Squence 3 : Le processus achats
Example of purchasing segmentation (Retail and Investment Banking Group - Extract)

POINT OF SALES AG1 Signs (external and internal) for PoS. AG2 Furniture AG3 Cleaning and facilities maintenance ARCHIVE AR1 Archive (digital and physical) MAIL CO1 Postal mail CO2 Subcontracted Mail CO3 Internal mail shuttles CO4 Express Mail CO5 Mail Room Equipment DOCUMENTATION DO1 Subscription UTILITIES PRINTS AND PHOTOCOPIES RI1 Production Printing Systems (Large Volumes) RI2 Printed Cheques RI3 Copy Machines and Self-Service Printing Devices RI4 Administrative Prints and Business Cards RI5 Sales Prints SECURITY AND SAFETY SE1 Funds Transportation SE2 Secured Contains for Cash SE3 Remote et Video Watch SE4 Security Equipement Maintenance and Control INTELLECTUAL SERVICES PI1 Consulting : Strategy, Organisation & Management PI2 Training PI3 Legal and Tax Advisory PI4 Financial Statement Control PI5 Interim / Temporary Labor
EN1 Water EN2 Gas EN3 Electricity INFORMATION FLOW FI1 Real time financial Information (Market Data) FI2 Financial and Marketing Databases OFFICE SUPPLIES FB1 Paper FB2 Computer and printer supplies FB3 Stationary TRAVEL FD1 Travel Agencies FD2 Airlines FD3 Railway FD4 Car manufacturer (and Long Term Car Rental) FD5 Short Term Car Rental FD6 Hotels and restaurants
IT TEC1 IT Hardware and related maintenance TEC2 Cash Dispensers and Automats TEC3 Software TEC4 IT Services
TELECOM TEL1 VOIP TEL2 Wire Telephony TEL3 Mobile (Wireless) Telephony TEL4 Special Numbers and Interactive Vocal Servers TEL5 Data (Networks) TEL6 Pabx
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Rpartition des dpenses d'achat par entit du Groupe

120 000
100 000
80 000
60 000
40 000
20 000
C N AS D EN BP C A BP M C C M M Au tre s BP PC BP I-B FO P N C IA BP R I BF BP BP V BP F BF BP C SU BP D O C C BP LC C C O O P BP AT BP L AL BP P AL S C AZ O SO 2L BP BP BP BP D
BR E
en K HT
BP
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IDRAC - 2012
27/01/2012
Rpartition des dpenses par grandes familles d'achats (Primtre Groupe Banque Populaire - donnes 2005)
Mutualisable Non Mutualisable
350 000 300 000 250 000 200 000 150 000 100 000 50 000
tra va ux ,. .) ex pl oi ta tio n) AR C H IV AG E C O U D R O R IE C U R M EN TA TI O N FL EN U ER X FO D G 'IN IE U FO R N R IT M U AT R E IO FR S N D A PR E IS B ES D U E R TA E D A EP TI U O LA N S C E IN R M E TE E PR N LL T O E G C R TU A P EL H IE LE S et IM P R IM ES SE C U TE R IT C E H N O LO G IE B S AC TE K LE O M C FF A O R IC M K ET E S B IN A G N C C AI O R M E M U N IC A TI O N (E nt re tie n,
En K HT
IL IE R IM M O B LO G IS
TI Q
U E
(L oy er s,
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Spend Analysis Tool Kit

Once the category scope is clearly identified, one has to start with a preliminary review of quantitative and qualitative datas : what we buy from whom ? The areas to be investigated are represented in the diagram here below.
Volumes Volume ordered by site or unit Volume ordered by supplier Volume seasonality
Prices and contracts Prices by unit Prices by supplier Prices by location Prices fluctuation Payment terms Frame contracts Product & Service specification Technical and functional specs Design and Quality specs Specification ownership Logistic agreement : transport, packaging, incoterms, delivery lead time, inventory management, EDI, e.procurement .
Average stock level by units Forecast Current suppliers Name, Group dependency Location, countries, zones Turnover Current market shares Expertise and service level assessment
The Spend Analysis Check-list : Quick quantitative and qualitative analysis of the product or service purchased 20
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IDRAC - 2012
27/01/2012
Where to get the data ? The preliminary RFI
Depending on the reliability of the various information systems

Accounting I.S : accounts payable
Turnover (VAT excluded) per fiscal year, per supplier code, If available : number of invoices, amount per invoice, quantities per invoice, unit prices, discounts,
Production and Inventory Management I.S :

Volumes per reference (or SKU Stock Keeping Units), Quantities variation per month, Average stock level
Purchasing and Supply Management I.S :

Frame agreements price conditions, price, yearly discount on turnover, currency, price indexes, Turnover per supplier and per company
Ask the suppliers !

Build a specific RFI table to be filled in. Ask equipment makers to get information on the market
Forecast :
Budgets, strategic plans, interviews.
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How to organize data ? 2 basic tools
Tool n1 : the PARETO Chart

Who are we buying from ? How much are we spending ? Pareto chart Quantitative analysis
% of total value
100% 95% 80%
A
20%
B
50%
C
100%
% of total events
Tool n2 : the category spend table

Who is buying what ? Who is buying from whom ?
Category spend dispersion table
Plant \ suppliers Plant A
Sup 1
M M M M M M M M M M M M M M M
Quantitative analysis
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IDRAC - 2012
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Quantitative analysis Tool n1 : Pareto tool ( ABC or 20/80 )
Why ? Method
To identify which are the priorities

% of total spend
100% 95% 80%
Pareto spend analysis of current supply base (ranking supplier per turnover)
Rank all data in a table from highest to lowest Calculate cumulative percentage for each line Split the table in three classes (A / B / C) representing respectively : 80%, 95% and 5% of the cumulative percentage
70 80%
A
20%
B
50%
C
100%
% of all suppliers
90% 80% 70%
Output
Pareto analysis can be applied to supplier turnover, to turnover per sub-segment of the category, to turnover per plant or company
60
57,93
50 60% 40 50%
Suppliers Spend
30,03
30
40% 30%
20
14,78
13%
20% 10% 1% 0%
10
6,1
6%
0
TO > 0,76 M 0,15 < TO < 0,76 M 0,015 < TO < 0,15 M TO < 0,015 M
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Quantitative analysis Tool n2 : The category spend dispersion table

Why ? To better understand the current spend on the category
Category spend dispersion table
Sub-Segment 2 Sub-Segment 1 Plant \ suppliers Plant \ suppliers Plant A Plant A
Is it concentrated ? Is it well-balanced ? Is it diluted ?
Sup 1 Sup 1
Sup
Sup2 2
M M M M M M
Sup Sup Sup Sup3 Sup4 Sup5 3 4 5

M M M M M M M M M M M M M M M M M
M M M
Method :
Identify for each supplier its turnover per plant, The analysis should combine the spend breakdown by sub-segment E-sourcing can be used to organize an internal RFIs and get datas from different companies buyers.
M M M
Concentrated Supply base
M Diluted Supply base
POTENTIAL FOR LINK AND LEVERAGE ?
Output :
Is there a potential for leveraving volumes (LINK and LEVERAGE) ? Are there different needs explaining the current supply base profile ? Are there already different prices and costs (for one same supplier depending on sites or between the different suppliers) Are there geographical constraints ? Are there suppliers operating at a global level ? Is the market structure only a local one ?
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IDRAC - 2012
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Rpartition des 53 M de dpenses parmi les tablissements du Groupe

Dpenses Transport de Fonds, Comptage et Gestion des automates par banque 2006 - M HT
9 7,9 8 7 6 5 4,0 4 3 3,2 3,1 3,0 3,0 2,9 2,6 2,6 2,0 2,0 2,0 1,8 1,8 1,5 1,4 0,9 1 0 BRED Alpes Sud Ouest Ouest Sud Rives de Paris Cote Azur Alsace Nord Loire et Lyonnais Toulouse Pyrnes Provence Corse Massif Central Atlantique Occitane Bourgogne Franche Comt Lorraine Champagne Centre Atlantique Crdit Maritime
(1)
100% 90% 80% 5,7 70% 60% 50% 40% 30% 20% 0,8 0,6 10% 0% Val de France
(1) Les dpenses des caisses maritimes de Littoral de la manche, littoral du sud ouest et Morbihan - Loire Atlantique sont extrapoles partir des rponses des autres caisses du Crdit Maritime Source Questionnaire BP Banque Fdrale et Collecte dinformations fournisseurs - 2006
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La rpartition des dpenses gestion des espces est proche de la moyenne observe dans les banques mutualistes
Rpartition des dpenses Transport de Fonds, Comptage et Gestion des automates 2006 - M HT
Gestion DAB/GAB - 5,8 M 11%
10% 1/3
Comptage - 20,1 M
38%
30%
1/3
Transport de fonds - 27,0 M
51%
60%
1/3
Banques Populaires
Moyenne Banques Mutualistes
Moyenne Banques AFB
Transport de fonds Gestion de caisse centrale Gestion des automates bancaires
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Source Questionnaire BP Banque Fdrale et Collecte dinformations fournisseurs 2006 - Analyse Mercuris
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IDRAC - 2012
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2
2.99 M
La rpartition des dpenses gestion et transport des fonds reste trs htrogne au sein des Banques Populaires
Dpenses Transport de Fonds, Comptage et Gestion des automates par banque, 2006 - M HT
1.80 M 1.78 M 1.54 M 1.38 M 0.75 M 2.04 M 4.03 M 3.19 M 0.94 M 1.99 M 2.00 M 3.04 M 2.63 M 3.10 M 2.60 M 2.91 M
7.92 M
0.32
5.68 M
53 M
100%
100%
0.1 0.2
0.18
0.1
0.14 0.23
0.24
0.3 0.2
0.21
0.25 0.66
5,8
1.66 0.82
Gestion des DAB/GAB
80%
0.2
0.67
0.6
1.44
80%
0.5 0.3 0.3
0.72
3.58
1.48 0.82 1.21
1.80 1.68
20,1
60%
2.04 1.07 1.31
Gestion de caisse centrale
60%
2.98
40%
1.3 0.6
40%
1.31
1.0
2.41
0.9 0.8
0.4 1.09
4.01
1.58
0.94 1.21
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1.30 1.10 2.00 0.87 0.78
Transport de fonds
20%
20%
Occitane Toulouse Pyr. Massif Central Atlantique
0% Nord Sud Ouest Bourgogne Fr. Comt Centre Atlant. Alsace Rives de Paris(1)
0% Cote Azur Loire et Lyonnais Lorraine Champagne Provence Corse

Val de France
Ouest
Alpes
Bred
BRED
Val de France
Sud
GLOBAL
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(1) Donnes confirmer Source Questionnaire BP Banque Fdrale et Collecte dinformations fournisseurs - 2006
Securitas/Loomis et Brinks reprsentent 60% du march des BP, march comportant 16 acteurs
France Scurit CORSTRANS TAS - NIT ITEMS - CD
GARANCE
Est Valeur
Solymatic
Panel Fournisseur 2006

BRED Val de France Bourgogne Franche Comt Lorraine Champagne Sud Alpes Rives de Paris Ouest Loire et Lyonnais Provence Corse Atlantique Cote Azur Sud Ouest Alsace Centre Atlantique Occitane Toulouse Pyrnes Nord Massif Central Crdit Maritime - Finistre Crdit Maritime - Caisse du Nord Crdit Maritime - Med Crdit Maritime - Vende Total CA Fournisseur total (2006, M) CA moyen par BP (2006, M / banque (1))
Securitas
Prosegur
SAZIAS
VALTIS
Brink's
ESSE
Total
Asdf
CPR
G4S
GSI
Dpenses 2006
x x x x x x x x x x
x x x x x x x x x x x x x x
x x
x x x x x x x x x x x x x x x x x x x x x x
x x x x x
x x x x x x
x x
x x x 17 15 6
4 4 3 3 2 5 5 1 6 6 3 3 1 2 2 3 3 3 2 1 2 1 1
5 1,7 0,4
5 1,0 0,2
3 6,6 2,2
3 2,4 0,8
2 0,1 0,1
2 1,8 0,9
2 1,6 0,8
1 -
1 0,3 0,3
1 0,4 0,4
1 0,3 0,3
1 1,5 1,5
1 2,2 2,2
16,5 15,0 1,3 1,0 1,2 0,2
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(1) Hors Crdit Maritime Source Analyse Mercuris
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IDRAC - 2012
27/01/2012
Rpartition des CA fournisseurs par type de prestation (2006 HT)

2.19 M 2.37 M 1.76 M 1.67 M 1.54 M
0.08 0.26
16.32 M 100%
0.98
15.02 M
6.55 M
0.28
0.13 0.13 0.07
2.29
0.51
80%
6.41 2.62 0.55 0.89 0.76 0.33
1.30 M 0.98 M
1.63 M
0.44
5.98
1.13
Dpenses Transport de Fonds, Gestion de Fonds et Gestion des automates par prestataire 2006 - M HT
Gestion des automates bancaires (6M - 11%)
60%
1.30
Comptage (20M - 38%)
40%
1.73 1.08 8.93 6.75 3.65 0.91 1.17 0.93 0.55 Transport de fonds (27M - 51%)
20%
0.50
0% Est Valeur VALTIS SAZIAS G4S GSI Solymatic Prosegur(1) CPR(1) Securitas Brink's TAS - NIT ITEMS - CD
(1) Ces fournisseurs nont pas de CA gestion des automates avec le groupe des Banques Populaires, mais ils proposent nanmoins cette prestation Source Questionnaire BP Banque Fdrale et Collecte dinformations fournisseurs - 2006
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Rpartition des dpenses par prestataire : transport de fonds uniquement
Dpenses Transport de Fonds par fournisseur (1) 2006 - K HT

10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 728 1 173 1 087 937 914 545 Prosegur 500 CPR 273 France Scurit 214 ESSE 135 CORSTRANS 80 GARANCE 3 657 6 757 8 934 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% TAS - NIT ITEMS - CD Brink's Est Valeur SAZIAS VALTIS G4S Securitas(2) GSI
1 000 0
CA moyen par Banque Populaire (3) (2006- en K)
593
559
1219
576
1176
270
914
460
136
500
273
214
135
80
(1) Hors Caisses maritimes Nord, Finistre, Littoral de la manche, Littoral du sud ouest et Morbihan - Loire Atlantique pour lesquelles le dtail des dpenses par prestation nest pas connus (2) Le dtail des dpenses de Securitas ntant pas connu, la part des dpenses correspondant au transport de fonds a t estime partir du % observ pour les autres prestataires de la BRED BP (3) Hors Crdit Maritime Source Questionnaire BP Banque Fdrale et Collecte dinformations fournisseurs - 2006
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Definition of the need

Specification
Formalise the Need

Set up a frame for the answer which will facilitate evaluation by the buyer
Establish the reference for the future business relationship between both partners
Need
Responsible : Requester Support: Buyer
Enquiry
Responsible: Buyer Support: Buyer
Contract
Responsible: Buyer Validation :Legal counsel
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Technical specification
It is a document in which all properties are described which enable to define the product from a technical point of view. The key elements are, for example : For a cleaning service : cleaning frequency, materials and equipments, staff qualification, .... This technical specification is used to :
(it is made of)

Subcontract, i.e. let a supplier carry out tasks which are defined in a technical document Buy catalogue goods or services
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Functional specification
(it is intended for)
It is a document in which the requester describes his need as a set of service functions and constraints. Assessment criteria and levels are defined for each function or constraint. Each level has a flexibility margin. EXAMPLE :
Functional specification for the internal lighting of a building : an number of lux , and a quality of colour of the light. (service function)
Technical specification : drafted by a design office : number of lamps, power in watt, fluorescent light A41 (technical function)
A technical function is a set of features of an existing product chosen by a designer to fulfil service functions.
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Functional analysis :
Without NEED Preliminary functional analysis : USEFUL FUNCTIONS UNUSEFUL FUNCTIONS
PRODUCT
With NEED
Preliminary functional analysis : USEFUL FUNCTIONS PRODUCT
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Functional analysis in six steps :

1. Define the context (broadly speaking) around the good or service 2. Define the functions to be fulfilled by the good or service (verb + complement) 3. Split functions in a) service functions and b) constraints
4. Describe assessment criteria for each function 5. Define performance level for each criterion (measurement scale) 6. Define flexibility for each criterion ; this enables to decide whether the criterion is satisfied or not
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To buy means to compare To compare, one needs choice The flexible functional specification permits the buyer to formulate his demands in a way which directs suppliers towards several solutions or variants
FUNCTIONAL
FLEXIBLE
Clarifies roles between requester and designer
Favours innovation
Increases competition
Promotes discussion in order to optimise performance / cost

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Example: Premises cleaning Floor

F1 F3
F4
Cleaning products
Cleaning
F4 F2
Buyer Requester
Windows
Cleaning Company
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Service Functions / Constraints
Functions Service Function F1 Clean floor
Criteria Poll Visual
Level >95% satisfied To be defined >95% de satisfaction To be defined 5 x / quarter 2 x / year
Flexibility +/- 2%
Service Function
F2 Clean Windows F4 Follow-up between supplier and buyer F3 Safety (non toxic)
Poll Visual
+/- 2%
Service Function
Constraint
Inspection by foreman Follow-up supplier / buyer Regulations
+/- 1 No
Official certification
No
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Purchasing & Procurement Function - Stakes
Negotiation
Legal: Incoterms
Buying on the Internet e-procurement
Price and enquiry Inventory Management Constraints Risks Strategies
Market Knowledge
39
What is the market structure ?
Two basic questions will illustrate the level of concentration in a market :

1- Are there many suppliers who buyers can purchase from ?
Suppliers
A lot Perfect competition Some Oligopoly
(risk of cartels)
Very few
A lot
Monopoly
Customers
What is the average market share of the suppliers ? 2- Are there many Buyers who can purchase from the supply market ? What is the average market size of the buyers ?
Some
Buyers market
Narrow market
Sellers market
Very few
Purchasing Monopoly
Buyers market
Bilateral Monopoly
Risk of false monopoly : Determine the difference between real monopoly / oligopoly and technological monopoly based on your needs specification
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Market knowledge
The types of markets :

Viscous Market
Only one homologated supplier
Supply
Demand
41
Supplier side
Supplier Market research :

Is the market concentrated split in many small units ? Number, size, age of competitors Overcapacity or scarcity ? Life expectancy of companies ? Market share of the leaders ?
Life stage of products ? Power of the supplier market ? Relative size of our supplier ? Motivation of current suppliers for this product ? ...
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Buyers side
Market research :
Is the market concentrated split in many small unit ? Number, size, age of customer companies ? Market share of the leaders ? Are there new competitors ? What is our power on the total buyer market ?
How important are we financially to our suppliers ?
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According to Porter, all markets evolve due to 5 forces
New Entrants
Upstream Market
Supply Market
Demand
Government action as disturbing flow
Substitutes
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Porter Force n1 : Demand
New Entrants
Bargaining power of Buyers
Upstream Market
The Bargaining Power of Suppliers
Internal rivalry among players
Supply Market
The Bargaining Power of Buyers
Demand
A Buyer Group is powerful if : Purchase volumes are large or concentrated Purchased products are standard The switching costs are low Capital investment is low to enter the market The buyer has full information about the supply market levers
Substitutes
45
Porter Force n2 : Upstream market
Bargaining Power of Upstream Suppliers

New Entrants
A Supplier Group is powerful if : A few companies dominate Suppliers are more concentrated than buyers
Upstream Market
Supply Market
Demand
No viable substitutes exist The supplier market industry is not an important customer of the supplier group Switching costs have been developed through product differentiation Forward integration is feasible
Substitutes
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Porter Force n3 : New Entrants
New entrants
New entrants are players not present in this market today. They are a disturbing influence as they do not abide to the existing rules of the main market. Their strategies can be completely different :
New Entrants
Upstream Market
Supply Market
Demand
Quick market share via a pricing strategy below the market Takeover of existing players Target existing buyers to work with via strategic partnerships
Substitutes
They could choose between 2 types of strategies

Cost domination : low cost producers, cheap products Product differentiation : increased service level or quality level
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Porter Force n4 : Substitutes
Substitutes
New Entrants
For example via innovation : this could mean that there are new materials which can satisfy the existing needs at a commercial advantage
Upstream Market
The Bargaining Power of Suppliers Internal rivalry among players
Supply Market
Demand
Substitute solutions disturb the current market offering new competitive advantage :
Lower costs Improved quality or reliability Improved service levels and easier service Removing the risks of shortages of supply by offering new sources to satisfy the same needs
Substitutes
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Porter Force n5 : Main supplier market (1/2)
Internal Rivalry among players

New Entrants
The level of competition on the market is a combination of :

Upstream Market
The Bargaining Power of Suppliers Internal rivalry among players
Supply Market
Demand
The internal rivalry amongst players on the main market The market trends : growing, reducing The actions of the 4 other forces The existence of Barriers to exit & Barriers to entry*
Substitutes
The level of competition on the market could be affected by Government action as a disturbing flow
Regulation : production quotas, WTO agreements Custom duties State Tax policies State Labor laws
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Example of Porter Diagram for Folding box market

The main market is protected from new entrants by different entry barriers
The need for capital investment Cost of know-how acquisition Limited access to upstream market at profitable conditions Controlled access to distribution channels by major players Power of local or historical brands
Upstream Market
New Entrants
Supply Market
Demand
Barriers to exit stop existing players from leaving the market

Not fully amortized production equipment The Business is covering a substantial part of the companies fixed costs Expected future profits Expecting better conditions to sale the business at an improved profit level
Substitutes
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Collect & organize information based on facts and figures
Number of players within a specified geographical scope Market share as a % Turnover Average size of production unit(s) Global capacity and average utilization rate Concentration rates Average profitability Group dependency Backward integration ? Barriers to exit
Who are the Low Cost Producers ? Where ? Where are the new entrants with product differentiation ? What is current and forecasted market share of new entrants ? What are the entry barriers ?
New Entrants + Entry barriers
What are the different upstream markets ? For each main upstream market :

Number of buyers

Concentration rate Average profitability Barriers to entry or exit Average capacity and utilization rate New entrants ? Substitutes ? Government action ? Forward integration ?
Upstream Market
Supply Market + Exit barriers
Demand
direct competitors from same industry indirect competitors from different businesses
Relative Market share, Purchasing Turnover Demand profile : simple, complex, season effect Profitability, Price policies, Purchasing strategies
Substitutes
Government action
Evolution of technology Market share of substitutes on the supply market,or on other advanced markets Reliability of substitutes
Evolution of regulations Trends on custom duties or imports & exports limitation Impact of regulations price & cost
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Purchasing Power
Purchasing power : 2 perspectives Turnover Bought by Buyer Turnover of supplier
Purchasing power =
1,5% < Best stay between < 20%

And :
Turnover Bought by Buyer Purchasing power = Turnover of entire market
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Purchasing & Procurement Function - Process
Negotiation
Legal: Incoterms
Market Knowledge
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Reverse Marketing
The 5 steps of Reverse Marketing :

1) Segmentation of purchases 2) Market Research :
Gather informations Process informations on the markets Analysis of both pans of the balance : supply and demand
3) Visualize the purchasing portfolio : constraints, risks, spent

4) Diagnostic of the situation 5) Purchasing strategy
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Purchase Constraints
Visualisation of portfolio with the Constraints Matrix.

A constraint is any element which limits the freedom of action of the buying side Constraints can be :
Internal ( Customer market, Company, Requester) or External ( Supplier market) Commercial or Technical Legal (Regulations)
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Constraints Internal Commercial
Visualisation of portfolio with the Constraints Matrix :

Internal Commercial:
Imposed supplier Lack of forecasts Small purchasing power Imposed purchase price No globalisation of purchases Bad knowledge of supplier market
Lack of preparation ...
Internal Technical :
Tight specification, over engineering Quality assurance No value analysis The company cannot follow the technical speed of change on the market Certification is difficult
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Constraints : External Commercial
Visualisation of portfolio with the Constraints Matrix :

External Commercial :

Monopoly or oligopoly Collusions on the market Narrow supplier market Rigid distribution system
External Technical :
Rapidly changing technology Technical monopoly Many possible technical solutions Short product life
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Constraints Matrix
Matrix of purchasing constraints :

Internal constraints
r
Internal Purchase
Complex Purchase
Every product is represented by a disk whose diameter is proportional to the purchased volume
Simple Purchase
External Purchase External constraints

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Strategy directions
IC
IC
EC
EC
Actions
People
IC
IC
EC
EC
Duration of the relation with the suppliers
Negotiation types
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Potential risks
Technical risks
Capacity of the chosen solution to answer the need No history of the chosen solution Quality level of the chosen solution
Logistical risks
Geographical distance Environment during transportation Communication means
Financial risks
Currency Financial covers Delivery guaranties
Supplier risks
Internal organisation Financial health Technical and/or R&D ability Supplier interest
Legal risks
Previous court cases Mastering of the legal environment Pressure means
Country risks
Social environment Political environment Economic environment International relationships
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Risk / Savings Matrix

The Risk/Savings Matrix: choosing priorities
Risk
High
PURCHASING
A
Average
B
Low
P R I O R I TY
A
Savings
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C C B
The Risks & Turnover Category Matrix

LINKS TO INTERNAL CONSTRAINTS (Technical and commercial) Specification is too tight which limits your potential supply market. A customer dictates which supplier we must buy from We are unable to globalize our purchase turnover, leading to higher price conditions We are unable to quickly change from one supplier to a new one : homologation, toolings ownership
High
BOTTLENECK
CRITICAL
2 types of Risks
RISKS
LINKS TO EXTERNAL CONSTRAINTS (technical and commercial) Our bargaining power with the supplier is low The market is evolving in a not favorable way for us We are dependant on a supplier : our purchasing amount is too high compared to our suppliers turnover
Low
TACTICAL
Low
LEVERAGE Savings or Turnover

High
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The Risks & Turnover Matrix : example in Food Industry (Biscuits)
5M
BOTTLENECK CRITICAL
CHOCOLATES
CEREALS EGGS FATS FRUITS & NUTS CORRUGATED FLAVOURS COMPACT BOARD FLEXIBLES FLEXIBLES
0.5M
TRAYS
MILK INGREDIENT
SUGARS
TACTICAL
LEVERAGE
OTHERS RAWS
OTHER PACKS
20 M
100 M
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Purchased SPEND/categories
Strategic objectives objectives - 5 key axes
The global objectives are defined in relation to 5 key axes
Secure supply and business
Innovate
Save costs
Improve Quality and service level
Promote sustainable development
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There are 6 main families of internal & external purchasing levers

Volume Globalization
Concentrate : downsize and optimize the supply base Link : Aggregate volumes of all units Leverage : Re-allocate market shares between selected suppliers to get optimum power differential Bundle : aggregate volumes from different categories
Cost Optimization
Cost model : In depth and detailed price and cost analysis TCO : all incurred costs analysis and optimization e-supply :e-procurement, e-supply. Make or buy : trade-off analysis between make, team and buy models Rent or Buy : rent or invest analysis. Facilities management with SLA. Coverage : Prices fluctuation and currency rate risk coverage.
New sources of supply

Global : Expand the geographical scope of sourcing LCC : Target Low Cost Countries Re-sourcing : Develop alternatives sources
Needs Optimization
Redesign to cost : functional and value analysis and product or service re-engineering Off the Shelf : Standardization of the specification Substitute : Develop alternative solution like product reformulation, ingredient or material substitution, SLA : develop SL requirements, including logistics agreement
Joint processes
Anticipate : optimize forecast models, improve reliability and frequency of forecast orders. SMI : supplier managed inventory No stock : consignment stock, Value chain re-engineering : redesign of the whole value chain. From upstream market to the final customer in order to optimize service level and maximize profit
Supplier Development
Identify and Develop suppliers : preferred, key or partner suppliers Co-business : alliances, partnership, risks, investment and benefits and shared wall to wall : supplier integration
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Some levers are more appropriate than others
it depends on your category positioning on Risks / Savings matrix

Category positioning Strategic levers families Globalization
BOTTLENECK CRITICAL TACTIC LEVERAGE
Level of impact
++
Cost optimization
New sources of supply
Needs optimization
-Joint processes
SR Development
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1- Which supply base recommendation ?

What % of your expenditure to allocate to whom ?
To allocate market share, we need to take decisions regards to :

The ranking of suppliers after the pre-selection process The level of competition we want to keep in the supply base The level of risks we are willing to take with our supplier
At the end, each supplier will have a specific role & profile in your portfolio :
Platinum suppliers Gold suppliers Silver suppliers Iron suppliers
Fit to your strategy
Number of suppliers
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1- Which supply base recommendation ?

What type of relationships ?
Fit between the supplier and your Category Buying Strategy (5 axes)
Meets your strategy 100%
Partner suppliers
Good almost everywhere Challenge on one axis but not on the others Achieve minimum requirements
Key suppliers
Preferred suppliers
Commercial suppliers
Relationship level
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Negotiation
Legal: Incoterms
Market Knowledge
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1 - Price
Price :
Play an active role :
Know the cost elements Be able to assess the price before negotiation : calculate target price Use productivity and learning curve to lower the purchasing price Make a difference between price, total acquisition cost and cost of ownership
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Price structure example
Price structure Cleaning Service) :
Base 100
Negotiation margin 3 different services Service 1: Desk cleaning
92 88 76
of the seller Profit margin Labour 3 Labour 2
Service 2: Floor cleaning Service 3: Windows cleaning The labour content is different according to the different services because techniques and frequencies are different.
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Labour 1
48 20
Purchases
Overheads
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Price typical structure
Profit
Revenue of shareholders Labour, specific purchases, patents,
Difficulty to obtain / check / understand
R&D
Overheads Non-quality Amortisation Transport Labour Purchases
Management, financial costs Scrap, rework, warranty claims, Production equipment Transport + duties, customs, Labour direct Energy, Raw material, components Value Industrial Added
Must know
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Basic cost calculation
Purchased Material + Industrial Added Value = EXW cost PM + AV = EXW Cost

To be described in purchasing currency
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Example : Price structure 35 dm3 pallet 7,02
Wood = main cost driver

Importance of wood acquisition cost Optimise wood volume
Transport = 110 km, lorry 600 pallets

Profit 4% Overheads 3% Comm Cost + Fin 3% Transport 8% Amortisation 8% Wood 66% Assembly 8%
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Global cost
Global cost versus purchase price

Price
Total cost
Complementary costs
-Transport - Packing
Landed cost
Acquisition costs Ownership

Insurance, taxes
Global cost of ownership
Maintenance Usage + elimination Non quality

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The enquiry
The enquiry:
Before sending the enquiry make a market preselection :
Eliminate all suppliers which do not comply with the purchasing policy / strategy Optimise ones efforts in concentrating on a limited number of suppliers The preselection is made through definition of the criteria to be fulifilled by suppliers
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The enquiry
Preselection criteria :
Staff size Membership of a group Geographic distance Turnover
Customer references Financial viability
Every supplier is assessed accordig to the criteria The enquiry is sent to the best ones
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The enquiry
After preselection the enquiry documents are sent :

Purchasing specification
Describes the functions to fulfil, The constraints and levels of performance Logistic requirements : delivery schedule, transport, packaging) Decision criteria
General Purchasing Conditions
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The enquiry
Assessment of offers :
List of criteria (price, delivery, quality...) Weight the criteria : priorities for the choice of a supplier Set up a comparison table with criteria and weights Fill in the table with a note for each criterion
Comparison with a global note
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The enquiry
Comparison table - example

Criteria Price Delivery
Weight 20 25 30 15 90
Supplier 1 20 15 30 9 74
Supplier 2 15 25 15 10 65
Supplier 3 10 15 25 15 65
Quality Payment terms Global note
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The enquiry
The comparison table permits to :

Identify the clauses to negotiate with each supplier : those for which its offer is less good than its competitors. Visualise each suppliers position To make up the short list of suppliers with which we will negotiate
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Example enquiry analysis presentations
Communication agencies competition for one of our retail banking network Competition for a multiple usage booth for fairs and exhibitions for one of our retail banking network Archive storage and handling services : selection of group preferred suppliers, negotiation of frame agreements.
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Negotiation
Price and enquiry
Constraints Risks Strategies
Market Knowledge
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Negotiation
Bargaining vs. Negotiation Sellers tricks Negotiate as a team with designers or users Application: Internal negotiation and communication Quality of Argument
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Buyer / Seller postions Tools : List of clauses Chessboard
Value of Argument
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Negotiation or Bargaining ?
NEGOTIATION BARGAINING Relationship between parties Midterm or long term Short term Negotiation = Game Positive sum game Zero sum game
Winner
Winner
Winner
Loser
Partnership
Stratagems - tricks
Negotiation vs; bargaining : Same or greater - gain and The relationship is protected Negotiation demands Methodology Psychology
Know how (50%) Success Behaviour (50%)
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Negotiation Options
Negotiation Position Strong Bargaining Efficient

Negotiation Offensive
Weak
Bargaining Shared
Negotiation Prepared
Short
Long
Duration of relation
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Buyer / Seller positions

Floor Seller movement zone Only the boss of the Seller can lower the floor
SELLER
Offer Convince
Clause Agreement zone Buyer movement zone Ceiling Only the boss of the buyer can lift the ceiling
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BUYER
Negotiation process : KC3
The key rules: KC3

Know The supplier, its market The sales person Set up negotiation file
Contact
Start the negotiation
Convince
Produce arguments and obtain agreement
Conclude
Conclusion of a negotiation Write report / agreement
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Negotiation: Know
Know : preparation is 80% of the negotiation effort
The supplier company, the supplier markets... The needs to fulfil, functions, specifications, quantities, schedules The history of the product, of the relationship The personality of the sales(wo)man : style, objectives...) The target : the stakes and objectives of the negotiation
The file:
The negotiation preparation

List all clauses to negotiate Identify needs for help from others, and make use of it Set objectives to reach for each criterion of the comparison table Decide the venue : In-house to feel at home : boosts the confidence of the buyer - but never negotiate in your office ! At the suppliers premises : show my determination Build the negotiation strategy and the negotiation chart ( = arguments, parades) and the chessboard strategy
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Negotiation :
6 levers
Weight Choice Information Influence Sanction Time
Clauses
Price After sales service Quality Logistics Packaging Commissioning Payment terms Order to delivery Currency Spare parts
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Negotiation Arguments
Possible arguments :
General :
Financial health of my company Image of my company Viability of my company ...
Specific :
Scheduling of needs Learning curve Interest of learning from the needs of a demanding customer
Constraints :
Poor performance of the supplier Price structure description lacks accuracy Competition between suppliers...
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Negotiation Chart
The negotiation chart :

Clause
The clause to negotiate
Offer Objective
Offer from the seller The objective the buyer w ants to reach
Argument
Objection
Reply
The arguments The The to reach the objections parades to objective w hich can the A good be expected sellers argument must from the objections be of seller advantage for the supplier or for the customer
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Negotiation: Chessboard strategy
The chessboard strategy
1: I wont give in
S 1 2 3
1 d c e
2: to be discussed 3: Ill give in
b a
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Negotiation: Contact
Contact:
Welcome the supplier
Establish a climate of trust Dont make the seller wait
Civilities Presentation
Let the supplier present his company Present ones company
Mention strengths of the seller and of his company

It makes the seller feel comfortable and prevents him to use those points later as arguments
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Negotiation: Convince
Convince:
Explain Listen Reformulate Propose Argue State / remind your needs to the supplier Negotiate more simple clauses first Conclude agreement point in reformulating Then negotiate more complex criteria : use arguments and parades of the negotiation chart In case of blockade on an important clause switch to a lower stake clause Conclude final agreement in reformulating it
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Negotiation in Team
A leader is nominated Define roles and power Complete solidarity is mandatory Prepare together Allocate sequences to team members
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Negotiation : 5 golden rules of the seller
Aim high to reach a good final result If one asks a concession from you, reply first with an argument Give a concession only against an other one If you have to go backwards make small steps Orient your customer towards conclusion
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Negotiation : play with arguments
Give strength to your arguments:

Use examples Demonstrate : show, let touch, make hear, . Make your arguments visible, make drawings, Amplify feelings : enthusiasm, disappointment, Dramatise
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Negotiation: Conclude
Conclude:
Make an inventory of all agreements which were reached and reformulate them Propose to write a negotiation report, write and send it quickly:
To the supplier To internal correspondents design, production, logistics, with appropriate comments
And taking care of secrecy
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IDRAC - 2012

January / february 2011

Jean-Christophe TRAN DGA, GIE BPCE Achats

BPCE Group Profile

http://www.bpce.fr/en BPCE Achats : The group purchasing organization

IDRAC - Procurement Training - 2012 - J-C TRAN

Purchasing categories (portfolio segmentation)

IDRAC - Procurement Training - 2012 - J-C TRAN

Price and enquiry

Buying with the Internet : e-procurement

Inventory Management Constraints Risks Strategies Market Knowledge

What do we mean by Purchasing in a company ?

What are the specific skills ?

What they have to do What they shouldnt do

Never choose this job if :

Margin Overheads Labour Materials & Subcontracting

Cost reduction and productivity

Competitiveness levers = how to reduce costs ?

External savings : Purchases

Cost reduction = impact of savings on profitability

Initial situation Turnover Purchasing Bought out expenses

1000 500 (50%) 300 (30%) 100 100

Labour Overheads (fixed) Net result

Profitability (Net Result / Turnover)

Overview of PROCUREMENT MANAGEMENT CYCLE

Portfolio analysis / Purchasing Strategy Action plans

Purchasing Management Procurement IS Management (Databases, ERP, e-tools, )

Steering and controlling

Performance measurement / KPI

Procurement Management = Purchasing and Supply Management

Supply Management process

2 complementary value chains

IDRAC - Procurement Training - 2012 - J-C TRAN

Purchasing Request (Qty, Delivery time, )

The role of purchasing function - fundamentals

The mission of the Buyer : The buyer is an internal service provider

The Purchasing Function

IDRAC - Procurement Training - 2012- J-C TRAN

III Specification of Need

II Negotiation I Supply management

Intervention time of Purchasing

Segmentation, Spend analysis, Needs analysis

IDRAC - Procurement Training - 2012 - J-C TRAN

Price and enquiry

Buying with the Internet : e-procurement

Inventory Management Constraints Risks Strategies Market Knowledge

The role of purchasing

Differentiated techniques : examples

spot buying vs long term commitment / partnership, Exclusive agreement vs co-buying.

Thus, it is necessary to organize the purchasing portfolio into Purchase Families :

Purchasing category definition

A purchasing category is defined by

IDRAC - Procurement Training - 2012 - J-C TRAN

A similar type of needs

A unique supplier Market

- Same suppliers - Same characteristics (oligopoly, monopoly)

Squence 3 : Le processus achats

Example of purchasing segmentation

10 purchasing families / 164 segments

B. Consumables C. Industrial supplies

Ex : segment 740 : Winding and engine repair

Ex : segment 890 : energy

Squence 3 : Le processus achats