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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
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
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
process of approval 1
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

slide5

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

slide6

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