Prof. Horst O. Bender, Ph.D. Rotterdam School of Management THESEUS Institute

1. ► ► ► ► STRATEGIC PROCUREMENT Prof. Horst O. Bender, Ph.D. Rotterdam School of Management THESEUS Institute Erasmus University (NL) hobender@B2B-MSI.com

2. THE SELLER-BUYER RELATIONSHIP MANAGING THE CUSTOMER BASE MANAGING THE SUPPLIER BASE • The marketing exchange equation has shifted • Customers have become more powerful and demanding • The selling firm must improve its established ways to work with customers,or develop entirely new ones • 4. The selling firm may have to change the process of bringing the company to thecustomer: it’s resources have need to to be activated for the customer • 5. Forming and leading key account teams becomes a core capability • 6. Contracting with employees becomes critical

3. THE DIMENSIONSPURCHASING STRATEGY Direction Setting Processes Procurement Strategy Development Procurement Organization Procurement Processes Supplier Management/ Development Strategic Sourcing Day-to-DayPurchasing Supporting Processes Performance Management Information Management Source: A.T. Kearney 1996

4. PURCHASING STRATEGY: TYPES OF SOURCED PRODUCTS Type of sourced product Types of industrial products: • Raw materials • Processed materials • Components and subassemblies • Light or accessory equipment • MRO supplies (incl. parts) • Office supplies • Heavy equipment • Business services • Major systems Direct (“A”) Indirect (“C”) Capital equipment and outsourcing Type of sourced products: 1. Direct product: enters the produced good (“A”) - normally some 80% of the total cost of purchased goods; 20% of parts numbers 2. Indirect product: used up in operating the business (“B”) - normally some 20% of the total cost of purchased goods; 80% of parts numbers

5. BUYING PATTERNS AND VALUE PROPOSITIONS PARTNERSHIP BUYING PRICE BUYING VALUE BUYING NAKED PRODUCT WITH OPTIONS NAKED PRODUCT SYSTEM Naked Product Naked Product,with Options 1 Naked Product,with Options 2 AVOID “CROSSED” TRANSACTIONS!!! Naked Product,with Options 3 System

6. BUYING ORIENTATION AND CUSTOMER RELATIONSHIP STRATEGY PARTNERSHIP BUYING PRICE BUYING VALUE BUYING PERSONAL SELLING/ KEY ACCOUNT MANAGEMENT TELE-MARKETING, INTERNET STRATEGIC ACCOUNT MANAGEMENT TRANSACTION CONSULTATION PARTNERSHIP

7. UPSTREAM SUPPLY CHAIN MANAGEMENT: An advanced sourcing concept aiming to attain competitive advantage through the management and continuous improvement of strategic alliances with upstream suppliers to co-produce customer value, co-eliminate cost, and co-generate speed selected THE ADVANTAGES OF ENTERING STRATEGIC SUPPLIER PARTNERSHIPS 1. Superior quality (TQM, SPC) 2. Greater speed 3. Frequent and reliable delivery (JIT) 4. Closer location 5. Lower total costs 6. Improved technology access and control 7. Better management of risk 8. Single sourcing and early supplier involvement 9. Joint value analysis 10. Close working relationships

8. ADVANCED PROCUREMENT • Sourcing philosophy: Partnership • Sourcing strategies: Documented and challenged by senior mgmt team • Quality: Six sigma levels • Availability: Zero back order Possible response to demand changes • Delivery: Hourly windows Synchronous manufacture • Total cost: Benchmarked in lowest 5% of world supply • Supplier base: Less than 100, and all world class • Stock: Greater than 50 inventory turnovers per annum • Cost: Negotiated price reductions Minimum total cost of ownership • Change: Engineering change costs minimized Cost of supplier change minimized

9. WORKING AS PARTNERS Customer Value Line Negotiating Range Supplier Cost Line t t t 0 1 2 A procedure must be agreed upon that specifies how value increases andcost savings will be distributed!

11. “From the highest level suppliers, we expect100-percent quality, 100-percent on-time deliveryand focus on continuous improvement to lower pricesand reduce lead times. Our customers demand this from us, and we expect that from you” Chris Bailey, VP Supply ChainManagement , Boeing

12. OUTSOURCING The company’s activities: Core Outsourcing in the electronics industry: Essential, Non-core Non-Core • Trends in outsourcing: • Physical activities- E.g. manufacturing • Intellectual activities - Information technology - Back-office processing - Design - R&D Source: Technology Forecasters, 2000

13. BACK OFFICE INTEGRATION RELATIONSHIP APPLICATIONS e-COMMERCE APPLICATIONS INFRASTUCTURE TECHNOLOGIES OUTSOURCINGe-SERVICES • Finance and Administration Fulfillment • Corporate Planning and Execution Supplier Management • Purchasing • Customer • Product Development/ Management Design Collaboration • Demand • R&D Management • Human Resources Logistics • Inventory/Asset • Management • Communications/ Internet Applications Web Infrastructure Development Tools • Middleware Supplier-Facing • Platforms • Security • Portals • Databases/Data Warehousing Trading Exchanges • Integration Customer-Facing • Platforms • Management Commerce Servers Applications Strategy Business Strategy e-Business Strategy Technology Strategy

14. THE LARGEST OUTSOURCING PROJECTS IN EUROPE Service Provider IBM IBM IBM Xchaning Atos-Origin IBM EDS Captiva IBM McKesson &Consortium Volume(2) 4,300 2,000 1,700 1,200 970 750 735 725 570 480 Customer Fiat (I) NTL(GB) AstraZeneca (GB) BAE Systems (GB) KPN (NL) Royal & Sun All. (GB) SKF (S) BBC (GB) Zürich Financial Services (CH) National Health Service (GB) Project (1) IT operation and software development Miscellaneous IT services Take-over of worldwide IT service & 1200 employees Human resource management Data center management IT infrastructure management IT operation and software development Mgmt of TV licensing operation and sales personnel IT development and maintenance in the UK Human resource management • On-going projects only • Millions of U.S. dollars Source: Manager Magazin, July 2003

15. Business Week, March 02, 2003

16. Business Week, March 02, 2003

17. e-PROCUREMENT: THE INTERNET EMPOWERS BUYERS • The Internet helps to shift the marketing equation: it empowers customers • Global, immediate availability of information- Global access to information- Global access to suppliers- Much easier to make comparisons • The Internet facilitates:- Price buying- Value buying- Buyer-seller partnering- Supply-chain integration • Pooled purchasing power: global buying groups • Hands-free procurement: management by exception

18. THE INTERNET CREATES PRICE TRANCPARENCY Highest Fence Lowest Time With Fence Without Fence

19. FREEMARKETS PRICE DROP

20. E-B2B: TYPES OF SOURCED PRODUCTS AND E-B2B OPTIONS

21. DIAGNOSTICS

22. ASSESSING SELLER- BUYER POWER STRUCTURE SELLING FIRM BUYING FIRM • The marketing exchange equation has shifted • Customers have become more powerful, sophisticated and demanding 1. On a -5 to +5 scale, our customers have become: -5 0 +5 less more powerful powerful

23. ASSESSING CUSTOMER BUYING ORIENTATION • There are three types of buyers: • Price buyers: seek to attain the lowest price • Value buyers: seek to attain the highest value • Partnership customers: are prepared to enter strategic alliances with suppliers to achieve long-term value gains and cost savings • 2. What is the percentage of Price Buyers Value Buyers Partnership in our customer portfolio? Customers Currently (2003) …………. …………. …………. In five years (2008) …………. …………. …………. What is their profitability …………. …………. …………. (to your company) (high/medium/low) PARTNERSHIP BUYING PRICE BUYING VALUE BUYING

24. VENDOR RATING • How does your business unit perform on the following supplier evaluation criteria? • Perceived value: • Product quality: • Lowest total cost to the customer • Financial strength and stability • Competence in technology/innovation mgmt • Compatibility in mgmt attitude and philosophy • Company size and production capability • Quality management competence • JIT competence • Sound cost control and information systems • Geographic location • Environmental orientation

25. For your product, who is typically the: User Influencer Buyer Decider Gatekeeper What benefits do How do you they seek? Reach them? BUYING CENTER ANALYSIS