MIM 524 Global Sourcing Class four

1. MIM 524 Global Sourcing Class four

2. Agenda • Sourcing StrategiesSupplier SelectionTotal CostOutsourcingScott Case PresentationsCurrent Events/Next Class Review

3. The purchasing process Define specification Select supplier Contract agreement Evaluation Follow up Ordering Expediting - Vendor Proc. Role Get specification - Assure adequate - Prepare contract - Establish - Establish expediting - performance supplier selection Order routine evaluation routine - Settling contract problems Elements Functional - Prequalification - Contracting - Develop - Expediting - - Vendor rating specification of suppliers expertise orderroutines - 'Trouble- shooting' - Vendor Technical - Request for - Negotiating - Orderhandling - evaluation changes quotation expertise Bring supplier - engineering knowledge to - Vendor balanced score card - Vendor profile - Vendor ranking Documents Functional Supplier selection - Contract Order Overdue list specification proposal Norm/spec. - control

4. Major bottlenecks and problems Supplier or brand specifications:most buyers are involved only to a minor extent in the specification phase, so the specifications of the user are often designed ‘towards’ a particular supplier Inadequate supplier selection:Insufficient screening of suppliers on financial strengths and technical capabilities leading to discontinuities of supply in delivery stage Insufficient contracting expertise:leading to misunderstandings on how supplier should perform and difficulties in solving delivery and quality problems Too much emphasis on price:Decisions need to be based upon total-cost-of- ownership (TCO) rather than price only Administrative organization:lack of clear procedures with regard to procurement or authorization of orders, leads to lack of control on purchasing expenditure and costs

5. Definition of concepts purchasing function ordering/ operational tactical / initial Internal customer Speci- fication Selecting Contracting Ordering Expediting /evaluation Follow up/ evaluation Supplier Sourcing Supply Buying Procurement

6. Collect and AnalyzeInternal Requirements Converge Internal &Supplier Data Develop SourceStrategy Execute Strategy& ImplementationPlan Manage SupplierRelationship • Identify Global Stakeholders • Establish global source team • Collect Internal Requirements • Analyze Internal Requirements • Validate with Source Team • ID, Analyze and Evaluate current supply base • Analyze current strategy • Collect Market Intelligence • Assess Market Conditions • ID savings opportunities • Establish internal goals and objectives • Prepare RFI • Commodity categorization • Commodity Strategy components • Commodity Strategy details • Develop implementation plan • Get approval / alignment & communicate • RFQ / RFP Process • Receive, Evaluate and Rank RFP Responses • Supplier Qualification / Selection • Review & Approval of Neg. Plan • Conduct Negotiations. • Develop Contract and Secure Internal Management Approval / stakeholder buy-in • Establish clear expectations on both sides • Track & Report on major Performance metrics • Regular performance feedback sessions • Continuous improvement sessions • Agreement on new goals & metrics • Develop continuous process by going to Track & Report ….. Source Team Formation Market Intelligence SSP Supplier Selection / Contracting / Auctions / Catalogs Continue MI SBR, SCQI / PQS etc. Five Step Sourcing Process

7. 2 1 4 3 5 PURPOSE Establish a global/cross functional team to gather / analyze and validate internal requirements prior to forming sourcing strategies Step 1 • KEY ELEMENTS • Global Source Team Formation • Gather Internal Requirements • Analyze / Validate Internal Requirements Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

8. Defining Business Partner Requirements

9. 2 1 4 3 5 PURPOSE This step augments the internal requirements from Step 1 with industry, supply base information and overall goals • KEY ELEMENTS • Supply Base Assessment • Assessment of Market Conditions / Intelligence • Assessment of Current Strategy • RFx • Identify Cost Savings Opportunities Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

10. 2 1 4 3 5 Market Dynamics • Determining the size of the marketplace, # major suppliers • The financial condition of this “industry” • Barriers to entry / Which suppliers are entering/leaving? • Substitute products available now or in the future • The suppliers to this “industry” and their leverage or lack thereof • Are there any activities in progress between two or more suppliers, or customers and suppliers, (development, collaboration, merger, etc.) that impact the overall supply base? • What combination of the following characterizes top suppliers in the industry? • Technology, Cost, Quality, Capacity, Manufacturing process capability, Capital expenditures, R/D expenditures, Proprietary products/processes, IP, Market development focus, Global reach / presence, Procurement services • Who Buys and Sells to Whom?? • Direct • Distributor/Agents (Wholly Owed, Independent) • Brokers Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

11. Financial Analysis/Ratios • Quick Ratio = Current Assets – Inv/Current Liability • You would want this greater than 1.0 • Inventory Turns = COGS/Inventory • Higher is better but Industry specific • Debt to Equity Ratio = Total Debt/Total Owners Equity • Generally lower is better • Net Profit Margin = Net Income/Net Sales • Higher is indication of health • Return on Equity = Net Income/Total Owners Equity • Low might be another “red flag”

12. Financial Analysis Summary • Financial Ratios measure the supplier’s financial health & performance • No single ratio alone should drive your conclusion. • Use various ratios as needed to perform comparisons: • Within Company: Trend Analysis over time • Within Industry: Comparison to like companies

13. Audits/Verification Beyond the Paper…. • Manufacturing Alignment • HVM, Job Shop, etc. • Manufacturing Capability • Process Controls/SPC • Capacity Planning (Capital equipment, labor, etc.) • Technology/Capability • Sample assessment? • Training and resource productivity • EHS considerations – OSHA audits? • Quality Operating Systems • Yield analysis/reliability • Metrology/Inspection • Materials Management • Planning/Scheduling/Forecasting • Supplier Management Programs • MRP Tool Suite • Inventory Mgt Processes (cycle counting, replenishment Models, etc.) • Locations and support infrastructure • Where, how much, channels, global presence

14. 2 1 4 3 5 PURPOSE Utilize internal data and external information to develop a source strategy (Strategic Sourcing Plan – SSP) Step 3 • KEY ELEMENTS • Commodity Categorization • Strategy Development Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

15. 2 1 4 3 5 Categorization may help identify a baseline strategy Categorization Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

16. a.Supplier Selection: What key supplier selections will be made this year & what gaps will they fill (e.g. capacity, technology, global, LCG etc.) b.Supplier negotiation: What are the key negotiation strategies (Alliance, Preferred, JDA, Collaboration Agreement, Licensing, tools such as eAuction) c.Supplier management: How will the team change the way they manage the supply base (SBR, SCQI, SRC, etc…)? Supplier Consolidation Opportunities? How will the new technologies be developed and/or sourced to gain or retain one-generation ahead competitiveness? Is the global sourcing team well engaged with the supply base in order to understand and influence technology improvements? What changes in quality performance and how it is managed will be made to improve the quality in the commodity, goods, capital, or services? How does Industry requirements and supplier performance in this category compare with other industries, customers, and competitors? What benchmarks/requirements validate these goals? 2 1 4 3 5 Strategy Components Supplier Engagement Technology Quality Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

17. How will the team change the current models for inventory, upside - downside, flexibility, liability, business continuity, service level agreements, on-time delivery, hold time, uptime, downtime, lead time, queue time, freight, logistics, etc…. to ensure uninterrupted supply/service at a lower total cost? Does the commodity have a robust business continuity plan? What changes will be made to the cost management strategies to ensure a competitive advantage (increase negotiation frequency, e-auction, outsourcing, cost models, benchmarking, buying consortium, etc…)? What new technologies and/or quality changes can be made to reduce lowest total cost of ownership? How will the Fulfillment methods in the commodity’s sourcing strategy change (PO, e-Payment (non-PO), p-Card, Catalogs, web scheduling, internet, intranet, p-Card, etc…) to lower total cost and improve service? 2 1 4 3 5 Strategy Components Availability Cost Fulfillment Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

18. 2 1 4 3 5 PURPOSE This step entails execution of Strategic Sourcing Plan including supplier selection, negotiations, contracting. • KEY ELEMENTS • RFx • Supplier Selection • Negotiations • Contracting Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

19. Request for… • Request for Information (RFI) • High Level • Budgetary estimates • Preliminary schedules • Feasibility • Request for Quote (RFQ) • Defined Scope of Work (SOW) – Clear what is needed • High Confidence Pricing and schedule commitments • Request for Proposal (RFP) • Clear on expected outcome or value add needed • Asking for suggestions on how to fullfill • Possible to respond with different scenerios • High Confidence Pricing and schedule commitments

20. Supplier Need Identified Supplier Selection Team Formed Material / Service Requirements Available Documenta-tion in Place (e.g. CNDA, SOW) Supplier Debrief Supplier Selection / Validation Conduct Supplier Analysis / Qualification & Negotiate Selection Scorecard Finalized 2 1 4 3 5 Supplier Selection • Some other factors to consider: • Low-Cost Geography Supply Base USE TQRDCE • EHS Compliance AS THE MODEL • Supplier Diversity • Legal Considerations • e-biz Capabilities Internal Requirements Market Dynamics Develop Strategy (SSP) Strategy Execution Supplier Perf. Management

21. 2 1 4 3 5 PURPOSE Global Sourcing team focuses on supplier management and improvements once the strategy (SSP) is defined and executed to. • KEY ELEMENTS • Contract Mgmt • Control of Excursions • Supplier Ranking & Rating • Supplier Biz Reviews • Benchmarking • Continuous Improvement Internal Requirements Develop Strategy (SSP) Strategy Execution Supplier Perf. Management Market Dynamics

22. Total Cost What is it beyond the formula?

23. DODGE 2 DR. FORD TOYOTA 4 DR BMW HYUNDAI Total Cost of Ownership KNOWN Purchase Price Tax & License Loan Interest Fees Lube Align Inspect Gas Oil Tires Insurance Windshields Mufflers Polish Filters Batteries Brakes Clutches ASSUMED Parking Speeding Tickets Resale Value Body Work Drive Train Replacements

24. Commodity Study Linkages SHOULD COST (Material + Equipment Depreciation + Labor + Factory Depreciation)/Yield)/1 - Gross Margin = Price What is the Total Cost of PC Ownership? Purchase Price KNOWN ASSUMED Hard Drive Upgrade Taxes Modem Memory Upgrade Productivity Cost of Slow System Internet Connectivity Costs Repairs Additional Software Loan Interest Fees Is benchmark data available? Resale Value Service Contract

25. What is the difference between Price & Cost?

26. How do you know you are getting a good price? • Should cost models – bottoms up approach • Must cost models – tops down approach • Competitive Analysis • Tear downs • Market analysis • Competitive Quotes • Benchmarks • Industry indicators and Trending

27. Outsourcing

28. POLAND KOREA MILAN, ITALY U.K. MINNEAPOLIS, MINN. TIANJIN, CHINA FLORENCE, ITALY FRANCE QINGDAO, CHINA NEW YORK, NY TURKEY HAYWARD CAL. US - Hayward PORTUGAL DONGGUAN, CHINA BAHRAIN LAHORE, PAKISTAN SHANGHAI, CHINA SPAIN KARACHI, PAKISTAN LOS ANGELES, CAL. MEXICO CITY, MEXICO GUANGZHOU, CHINA SHENZHEN, CHINA BOMBAY, INDIA NEW DELHI, INDIA DOM. REPUBLIC BRAZIL TAIWAN GUADALAJARA, MEXICO EGYPT GUATEMALA HONG KONG BANGALORE, INDIA DUBAI DURBAN LESOTHO Madagascar KENYA JORDAN ISRAEL PHILIPPINES HONDURAS EL SALVADOR MADRAS, INDIA SAIPAN VIETNAM NICARAGUA SRI LANKA THAILAND DHAKA, BANGLADESH SINGAPORE CHITTAGONG, BANGLADESH F I J I MALAYSIA MAURITIUS INDONESIA SWAZILAND LEGEND Chanels & PRODUCTION SERVICES (ODMs) PRODUCTION SERVICES Why Outsource? • 80% of the top 400 US companies operate on a global scale

29. Outsourcing - Industry Trends

30. Description Savings Realized 10-15% 15% 10-15% 5-10% 4-5% 20-25% 10-15% 10-12% 7-10% Route Design & Optimization Closed Loop Dedicated Operations Mode Conversion Core Carrier Management Rate Negotiation & Audit Inbound Consolidation Reverse Logistics DC Location Realignments Reduced Inventory Outsourcing - Industry Trends – 3PLs Contract Logistics Savings Potential

31. In-source Buyer has cost advantage Technology is strategic – value add Intellectual Property & Trade Secrets Sunk cost of existing overhead/capacity Lack of capable suppliers Core Competencies – aligned with long term strategies Organized Labor, Governmental or other that restricts outsourcing Outsource High capital start up or expansion costs Cost advantage by scale to outsourcer & pooled purchase Volume fluctuations and long term risk Good/Service is readily available in the market Capacity and labor constraints with Buyer Specialized skills/focused development Limited technical resources In-source or Outsource..

32. Intellectual Property People Capital Equipment Geography Need for Flexibility Design and Product Concept NPI Technology Capacity New Markets

33. Design Flexibility and Cost of Design Changes Idea Generation Bus. / Tech. Assessment Concept Development Eng. And Design Prototype/ Ramp-up Full Scale Operations High Cost of Design Changes Flexibility in Design Low Time

34. None “White Box” “Gray Box” “Black Box” No supplier involvement. Supplier “makes to print.” Informal supplier integration. Buyer “consults” with supplier on buyer’s design. Formalized supplier integration. Joint development activity between buyer and supplier. Design is primarily supplier driven, based on buyer’s performance specifications. Spectrum of Supplier Integration Increasing Supplier Responsibility

35. Shifting of Risk/AccountabilityWho Owns? • Design of the product? Manufacturability? • Product Roadmaps and families? • NPI to Low Cost Geo transfer? • Test the product? Who’s test plan? • Management of the material and AML*? • Ownership of the supply chain? • Ownership of Tax/License/Customs and Logistics? • Branded Packaging/Collateral? • Post Sales Support/Warranty/Repair? • Market Analysis & Feedback? * AML- Approved Manufacture List

36. Systems Outsourcing Strategies • OEM-in • Take a competitive of the shelf product, modify industrial design to create specific ‘look and feel’, distribute to market place • Manufacturer, by definition, makes similar product • Manufacturer owns AML (Approved Manufacture List) • Manufacturer owns Quality • ODM (Original Design Manufacturer) • Find Manufacturer with technical/process expertise, co-develop product according to internal spec. • Manufacturer does not have similar product in production or it must be significantly altered • IP (Intellectual Property) may be jointly owned or owned singularly by Intel or Manufacturer • AML (Approved Manufacture List) is jointly owned/developed • Intel may specify particular components of the BOM, may do pass through pricing or consignment

37. Hardware Outsourcing Strategies • CEM – Contract Electronic Manufacture Model • Buyer owned IP (Intellectual Property) • Buyer and supplier jointly own AML (Approved Manufacture List) • PTP (Pass Thru Pricing) and Consignment are used • Focus is on conversion • Supplier does not market products or services to consumers

38. Pro’s & Con’s • OEM-In Model • Pro’s – TTM, min. investment, cost • Con’s – Licensing, limited flex to mfg, bundle, change, reconfigure, limited WW capability • ODM Model • Pro’s – DFM (Design for Mfg), flexibility in design/configure, mfg solutions, IP ownership • Con’s – Slower TTM than OEM-In, more investment – operationally/supply management, limited WW capability (Ex: Taiwan) • CEM Model • Pro’s – Design Control, cost at volume, WW capability, supply chain • Con’s – TTM, cost with lower volumes, heavier investment

39. Materials Management Design (Product) Design (PCB) Prototyping Prototyping PWA Materials Management Design (PCB) PWA Design (Product) System Assembly And Integration System Assembly And Integration Distribution And Logistics Distribution And Logistics Repair And Maintenance Repair And Maintenance TraditionalCore Business TraditionalCore Business Industry Analysis: CEM’s Vs. ODM’s Contract Electronics Manufacturing (CEM) companies provide a range of services including traditional Printed Wiring Assembly (PWA) along with a growing suite of integrated services and business solutions Expanded Service Offering Original Design Manufacturing (ODM) companies provide a range of services including traditional Product Design to basic Printed Wiring Assembly (PWA) along with a growing suite of integrated services OEMs and ODMs continue to close the gap between services

40. Scott’s Case Presentations

41. Current Events

42. Next Class • Contract Terms and Formation • Guest Speaker – Tom Alessi • Current Events

43. Questions?