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Direct material spend reduction – Procurement tool

Direct material spend reduction – Procurement tool. Price Simulation and Spend management Solution for Printer Manufacturing Operations. Binoy Syed , Chinmay Mesaria, Rodrigo Lavieri , Patricia Tanaka, Sanjeev Sharma October 2011. Background.

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Direct material spend reduction – Procurement tool

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  1. Direct material spend reduction –Procurement tool Price Simulation and Spend management Solution for Printer Manufacturing Operations Binoy Syed , Chinmay Mesaria, Rodrigo Lavieri , Patricia Tanaka, Sanjeev Sharma October 2011

  2. Background Procurement related commodities price and associated uncertainties significantly impact HP’s bottom-line, hence there is a need for a proactive process to manage and drive the input cost reduction COMPLEXITY OF THE BUSINESS PROCESS • Constant changes in design by the Engineering team • Absence of any report which helps assess the impact of proposed Price change • No workflow management to handle the change requests coming from various users Spend of 500 Million USD, with a gap of around 10% more spend compared to Asia manufacturing operations • IPG has over 50 different printer models, each with 200 to 600 parts • Besides design changes, the costs for existing parts may also change along with supplier shares and contracts • the management had no visibility to assess the impact of a proposed price change or introduction of a new part to the bill of materials to their overall procurement costs HOW BUSINESS WILL USE THE SOLUTION • Will use results for short term price change requests from various users and long term to drive the cost reduction strategy • The simulation engine ( business logic build using customized SQL queries) will showcase the impact of a change before it actually gets implemented • Regular reports around spend in different categories- control panels, PCBs, Plastics, Sheet Metals, cables, scanners, etc • Multiple users can request changes and check results, helping them make better business related decisions. • Analysis around CostedBill of materials, and see how the input costs are changing month on month

  3. Process of Approval …1 Price Change request from sharepoint by Manufacturing partner or Commodity managers Commodity Manager at various locations inputs Value in an Excel template Bill of Materials for all printers by Engineering team Approval Price and Vendor list Database created and temporary costed BOMs are calculated for each month Create Costed Bill of Materials Send out Emails to Commodity Managers after Approval/ Rejection See Simulations and Approve/ Reject Price Change requests Procurement Manager runs simulation and Approves request Calculations involved are rather complicated, due to new suppliers being added, new part introduction, changing supplier costs, and their share of supply which impacts the overall weighted cost of the product

  4. Process of Approval…contd.

  5. Solution Architecture 2 1 • The tool workflow, SQL server and .NET based solution being build on labs server Engineering team SharePoint /Web Server Logging Security Layer Analytics solutions Commodity Managers Presentation Layer Bill of Materials UI Components, UI Process Components Controller Forecasting Trend Analysis - Time Series Models (ARCH) Customized Mail with approval status Business Layer/ Service Interface Contains business workflows and high level interface Data Access Layer Service Data access Logic Components Simulation Configuration Agents Simulation Results 3 Procurement Lead GenerateCustomized Email Alerts Centralized Supplier Database

  6. Analytics Techniques Overview • Simulation analysis of Price change requests to assess impact on total spend targets • What –if / scenario results estimation showing how choosing between options affects the business’s cost reduction targets • Forecasting of Price changes using ARCH/ARIMA regression models • ANALYTICS • Simulation of Price change proposals to see impact • Conduct sensitivity analysis to see which commodities have highest impact on overall procurement spend targets • Analysis around Supplier base rationalization, if for some parts suppliers can be reduced , changed • Forecasting of Price changes for Commodities • RESULTS OF THE SOLUTION • Ability to generate costed Bill of materials from using supplier database, supplier shares and price lists and see final cost of producing 1 printer unit • create reports which give Impact of proposed price change/ supplier change/ engineering changes • Put together a workflow to handle requests of changes in the Price/Engineering Bill of material List • Manage historical data • INSIGHTS FOR BUSINESS • Help achieve a reduction if procurement spend in line with their long term targets, currently Brazil procurement team spends around $45 million more on procurement than Asia operations, this gap will get reduced by using analytics from this tool • Replace existing 3rd party solution which manages the database , it costs USD 1 million to maintain currently

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