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Greetings from Procurement Services Associates!
Mr. Gun Shim has joined Material and Contract Services (MACS), PSA's sister company. In his new Director position, Gun will be spearheading MACS's ongoing development into Cooperative Purchasing Programs using a plug and play web-based eProcurement system for ordering and receiving of goods and services including payment of supplier invoices. Customers who purchase through the consortium will enjoy better pricing achieved by leveraging higher volumes; suppliers will enjoy increased volumes and revenue growth.
Mr. Shim has over 17 years experience in the fields of Supply Chain and Finance. He recently left SBC where he served in a leadership position across their supply chain and procurement operations, including program managing up to $18B spend, was directly responsible for the sourcing of $7B spend, and led one of the largest purchasing operations in the country. Gun Shim also played a key leadership role in successfully managing three supply chain mergers while at SBC.
We would like to conclude this year by wishing all of you "Happy Holidays" and a new year of success and prosperity.
The topics included in this issue of our quarterly newsletter:
Procurement and the Evolution of the Supply Chain
Employment Services Industry: Temporary Workforce Trends
Why Heating Oil Will Cost $300-$800 More This Winter
Cotton Pricing Looks to Stay Firm
Nickel – 2007 Price Forecasts Are Lower
Copper Prices Will Be Lower In 2006
We hope you enjoy the newsletter and contact us with your suggestions and comments.
Best regards,
Dan P. Plute, President
Procurement has always had its own spotlight but it must adopt the mission of the supply chain. Global competition will drive aggressive reductions in the total cost of ownership, improvements in service, and productivity enhancements. Success will require transactional and strategic sourcing excellence. In this communication, I am going to focus on strategic sourcing. What is it? It is the process of meeting your organization’s direct or indirect material or service requirements through the least number of suppliers while achieving the lowest cost of acquisition at acceptable risk. That’s a mouth full!
The starting point is data, data, and data! You can’t reduce costs unless you conduct a spend analysis. Direct materials tend to be in better shape because specifications are formalized and approval processes are well defined. Indirect materials including maintenance, repair, and operating (MRO) don’t receive as much attention. Critical data can be missing if fields are not mandatory, and procurement professionals are not disciplined to provide the data.
Any program must have focus to be successful. Priorities are set based on dollar impact and probability of success. A two dimensional grid is a good way to present the data. So often the spend analysis reveals that there are too many suppliers for a commodity category. I remember a spend analysis presentation to a potential Strategic Distribution Inc. customer. The procurement professionals were astonished at the forty or so suppliers for the commodity. The initial focus should be on “low hanging fruit” which generates cash immediately and establishes credibility. Inevitably initiatives are required because market dynamics change and procurement professionals do not have time during the normal course of business.
Supplier selection must include a risk/benefit assessment; this is best coordinated using ePocurement. The Request for Information (RFI) temlate generally asks the right questions in a common format. Potential risks are quality, financial stability, and reliability of supply. Remember that the “bitterness of poor quality or supply failure lingers long after the sweetness of a cheap price is forgotten.” Distribution centers or local branches close to your facilities will reduce lead times, ease the pressure of emergency orders and reduce your inventory requirements. Vendor Managed Inventory can lead to a win-win situation. The supplier is provided with forecasts and material is supplied on a consignment basis. Material is not invoiced until it is used. At Avon Products we were very successful in implementing this process for both direct and indirect materials. This is another good way to reduce inventory costs. Lack of service can cost you money and credibility. Look for suppliers with compact business processes and flexibility.
Supplier selection should be a portfolio approach just like your personal investments. Categorize materials and services into strategic, non- strategic, and miscellaneous buys. Materials are strategic if they are unique, expensive, or hard to get. Strategic materials or services can bridge an inter-company relationship joint venture where one party supplies an upstream product to another. Non-strategic materials are less restrictive in specification and more readily available. Miscellaneous materials can be “one time or infrequent buys.” Always look for opportunities to move miscellaneous to non-strategic buys. Low cost countries including China, India, Taiwan and others should be a part of the portfolio. At one time, low cost countries supplied little product but were used to leverage western suppliers. Today these countries should be suppliers but a thorough risk assessment is imperative. You should develop a process, which includes plant inspection, process evaluation, environmental risk assessment, and relationship development. In China there still is a range of manufacturers, from privatized, state of the art, well run operations to state owned and not well maintained or managed. The key to success in low cost countries is to do a risk assessment, set up a formalized quality control and quality assurance program, and an effective supply chain.
Leverage is always an important tool but even more important today in strategic sourcing. Suppliers are standardizing the way they do business. Differentiated pricing is a challenge without volume. Leverage your purchases through standardization of SKUs, aggregation across the enterprise, consolidation of suppliers, and use of e-procurement tools. For strategic materials, a close collaboration is required with suppliers to reduce costs through joint investment, acquisition, or supply chain optimization. Value is also derived from other collaboration such as market intelligence, advertising, and development of new products. For non-strategic materials or services, a formal eRFP process including reverse auctions can be an effective tool. I do not recommend the use of reverse auctions for strategic materials or services. Reverse auctions do not build supplier relationships. The spend for miscellaneous materials is usually not well defined. E-procurement should be used with a combination of preferred vendors and online RFQ capabilities. Monitor and move repetitive “one time buys” to the non-strategic category where they can be better managed. Small to midsize companies can generate leverage by joining with other companies in a consortium. This preserves supplier relationships while achieving aggressive pricing not possible without aggregation. Outsourcing what is not a core competency can leverage resources. A leverage analysis forces you to understand strengths and weaknesses.
I have tried to highlight some considerations in strategic sourcing which can be important to improve the bottom line and productivity. Procurement professionals must be supply chain aware, astute business people, and change agents seeking transactional and strategic sourcing excellence. Automate what is repetitive and focus on strategic challenges.
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Dr. Otto Furuta's Biography
Global Supply Chain and Procurement
Dr. Furuta has been a leader in global supply chain and procurement in the chemical, personal care, and integrated supply industries. He held vice presidential positions at Great Lakes Chemical, International Specialty Products, and Strategic Distribution Inc. and was Director, Global Sourcing for Avon Products Inc. in NYC. He is a strategic thinker and a proven international negotiator who is able to deliver. The result has been over $75MM in cost savings for services and products. Because of his strong process orientation, he has been successful in streamlining operations including consolidation of customer service in Europe. Utilizing his skills in change management, he has successfully led cross-functional, multi-cultural global supply chain and strategic sourcing projects at both Great Lakes Chemical and International Specialty Products for direct and indirect materials and services. At Avon he designed and implemented innovative e-sourcing strategies including reverse auctions for direct and indirect materials and services. Dr. Furuta has been very successful in sourcing chemicals, production materials, and MRO from offshore sources including China, India, Taiwan, Philippines, Latin America, and Eastern Europe utilizing a process which he developed. His technical background (PhD, Chemistry) and manufacturing experience complement his strategic sourcing, supply chain, business development, and international business skills put him in a unique position to solve a broad range of problems. In the feature article in Purchasing Magazine (January 2003) he was recognized for his strategic thinking, risk mitigation, and offshore sourcing while Director of Sourcing for Avon Products Inc.
For the ten-year period 1994-2004, the Employment Services industry employment added about 179,000 new jobs in California, an increase of approximately 41 percent. This fast growing industry includes temporary help agencies. These agencies:
• Hire people to provide employers with additional workers for a limited period of time.
• Report the temporary jobs under the Employment Services industry NAICS 5613, not under the employer's industry.
• Employ production, transportation, and administrative support occupations that are projected to grow at a high rate within temporary help while the statewide growth rate across all industries is small or, in some cases, declining for these same occupations (2002-2012 California employment projections).
Job seekers who are trained or who have experience in these occupations may want to consider temporary help agencies in their job search in addition to the traditional employers who hire these occupations.
Employment Services Industry highlights:
• Nationally, it is the fifth fastest growing industry, projected to grow about 1.7 million jobs, an increase of 54.3 percent for 2002-2012.
• LMID's 2002-2012 California employment projections forecast continued and increasing growth, with a projected increase of nearly 58 percent by 2012.
• Almost all of the top 25 occupations in the Employment Services industry have a projected growth rate within the industry that is at least two times greater than their total statewide growth rate across all California industries.*
• In 2004, the industry's annual average employment included about:
o 98,000 office clerks and administrative support workers,
o 82,000 laborers and freight, stock, and material movers, and
o 53,000 production workers.
The surge in heating oil prices this fall was magnified by tight supplies, analysts say. Government data show that the nation's inventory of distillate fuel, which includes heating oil, shrank on a weekly basis for two months. In mid-September, Hurricane Ivan forced refineries along the Gulf Coast to shut down and evacuate employees. Rather than restart operations once the storm passed, many started pre-winter maintenance earlier than usual. Inventories of distillate fuel are now roughly 13% below year ago levels.
The other concern is the high price of crude oil, from which heating oil is refined. While crude futures are down from late October highs above $55 a barrel, they are still 50% above year ago levels due to surprisingly strong demand, a thin global supply cushion and market fears about the war in Iraq, labor strife in Nigeria and other tensions in oil producing nations...The cost of crude oil accounts for half the retail price of a gallon of heating oil. The remainder is due to refining and marketing costs, taxes and profits. The strengthening economy has helped push natural gas futures up 50% from a year ago to roughly $7.20 per 1,000 cubic feet. Still, many brokers say speculation played an outsized role in the rapid rise of natural gas futures this autumn, since there is plenty of fuel in storage ahead of winter. The latest Energy Department data showed the nation's natural gas supply to be 8.7% higher than the five-year average.
Nickel futures traded on the London Metal Exchange (LME) have risen by 60% over the past two years as output from mines has lagged world consumption driven by Chinese demand for stainless steel. Demand for nickel is expected to exceed supply by 16,000 metric tons, Standard Bank of London has calculated. Toronto-based Inco has a major mine and smelter project already underway in Canada and is plotting another development project in New Caledonia. Melbourne-based BHP Billiton also is planning a billion-dollar project, in southwestern Australia.
The GSJB Were brokerage in Australia has just forecast $1.30/lb as the 2006 average price for copper. In New York, Credit Suisse First Boston projects $1.42 while J.P. Morgan Securities says $1.20 and Merrill Lynch forecasts $1.25 in 2006. "The key to copper prices is the long awaited increase in refined capacity, which seems to be taking longer to eventuate than most thought," says the New York brokerage. Merrill Lynch says that with the tightness in the market lasting longer than previously estimated, it has revised its supply/demand outlook for refined copper—and now expects to see a minor deficit in 2005 of 11,000 metric tons becoming a surplus of 323,000 in 2006. With investors and speculators nervous about rising interest rates, "it would not be surprising to see copper work its way lower," agrees Adams at BaseMetals.com. He says one key to next year’s world copper pricing probably will be the slowing economy of the U.S., the metal’s second-largest market (after China). Also, the International Copper Study Group’s data for the first seven months of 2005 shows that copper demand fell to 9.66 million metric tons from 9.77 million metric tons in the same period last year, "which does not portray a particularly strong picture," says Adams. He says "the prospects of higher interest rates (to combat inflation) seems to be making some investment funds review their commodity holdings, especially as higher interest rates also raise the cost of holding commodities."
PSA Newsletter Archive
Issue 8, Winter, 2008
Issue 7 Fall 2006
Issue 6 June - August 2006
Issue 5 March - May 2006
Issue 4 December 2005 - February 2006
Issue 3 September - November 2005
Issue 2 June - August 2005
Issue 1 March - May 2005