The manufacturing industry continues to feel the strain of a saturated western market and competition from emerging markets, particularly those in Asia. As a result, leading companies have adopted new procurement strategies such as supplier collaboration, in an effort to cut costs. Our experience with shows that companies at all levels of the supply chain could collaborate more to reap the benefits of a global supply chain, and they should take a varied approach to sourcing different categories of parts. This paper examines current challenges in direct material sourcing, such as increasing technological complexity, a strain on raw materials, and the need for better procurement risk management. It then outlines procurement best practices in general and for specific categories of goods, as well as discussing procurement risk management strategies.

1. Gaining Competitive Advantage through
More Effective Direct Material Sourcing
How Industrial Equipment Suppliers Can Implement
Procurement Best Practices to Reduce Risk and
Improve Cost Structures
By Florian Kache, Lars Bettermann and Ralf Mägerle

2. 2

3. Introduction
The manufacturing industry continues to feel the strain of a saturated western
market and competition from emerging markets, particularly those in Asia. As
a result, tier-one suppliers have adopted new procurement strategies such as
supplier collaboration, in an effort to cut costs. Tier-two suppliers are following
suit and discovering that optimized and transformed procurement organizations
can help them beat the competition.
This report examines current challenges low-tech parts from best-cost countries, In some cases, a supplier should consider
in Direct Material Sourcing, including having them assembled in the region they acquiring a raw materials company in
increasing technological complexity, a are purchased. And they manage a base order to secure the supply. By doing so,
strain on raw materials, and the need for of suppliers of complex parts from the supplier has the opportunity to gain
better procurement risk management. developed countries. Suppliers of complex a vital advantage for some commodities,
It outlines procurement best practices in parts should meet requirements regarding particularly the rare earth compounds
general and for specific categories of flexibility, and they are usually asked to that are vital for the electronics industry.
goods, and the paper covers procurement contribute ideas for design and
risk management strategies. Primarily functionality.
focused on the automotive sector, these Procurement Risk
findings and insights are applicable in Management
other industries that involve industrial Information Sharing in the
equipment. Supply Chain Procurement risk management processes
are a must-have for suppliers to achieve
Accenture’s experience with Direct As the number of players in the supply higher procurement performance. To be
Material Sourcing shows that suppliers chain increases, so does its complexity. successful in the market it is critical for
at all levels should collaborate more to Often suppliers are scattered across a buyers to anticipate and rapidly react to
reap the benefits of a global supply chain, multitude of countries. High-performing, changes, while simultaneously investing
and they should take a varied approach tier-one suppliers manage the complex in relationships with those suppliers
to sourcing different categories of parts. supply chain with information sharing – that offer the lowest price and show the
both upstream and downstream. The best potential. Suppliers should actively
For instance, they could differentiate ability of suppliers to share information manage their own suppliers, develop
between suppliers of high-tech and along the supply chain will remain a non-exploitive close collaboration with
low-tech parts and implement separate main differentiator for procurement them and build on common values. By
processes for procuring goods that excellence. doing so, tier-one suppliers have the best
contain different raw materials. In opportunity to reduce supply risks to the
addition, suppliers can potentially benefit benefit of both parties and achieve an
from sharing certain information in the Efficient Raw Material optimal cost-benefit ratio. In addition,
supply chain, ensuring the supply of Management the quality and price of the end product
raw materials and conducting effective are likely to improve since trusted tier-
procurement risk management. Efficient raw material management two suppliers will be involved in choosing
strongly contributes to the market the raw material mixture, and the supply
share a supplier holds. Larger tier-two chain will be stronger, giving suppliers a
Differentiating Between suppliers are recommended to negotiate key competitive edge.
Suppliers of High-Tech and long term pricing contracts and thus
secure a raw material supply for the long
Low-Tech Parts term, balancing the cost of doing so with
High-performing tier-one companies availability requirements. For suppliers in
differentiate among their suppliers based best-cost countries, that process may be
on the technological complexity of the easier, due to their proximity to mines
parts provided: These companies source and raw material processing facilities.
3

4. Supply Challenges Faced in the
Manufacturing Industry
Automotive suppliers, like most industrial equipment
suppliers, face numerous challenges, both internally
and externally.
External Challenges Internal Challenges players in the supply chain. In fact, those
that do share this information are often
Raw Material Management Supplier Collaboration regarded as “exotic,” since they appear
Like any other major industry, the Depending on the size of the company, to have given away the “heart” of their
automotive sector is affected by increasing a change in mindset may be needed business. However, this ignores the true
cost pressure from raw materials. The for a tier-one supplier and beyond to benefit that sharing selected information
fluctuations in the price of raw materials engage with upstream offshore suppliers. with selected, preferred suppliers can
have caused cost-target uncertainties. Whereas large multinationals may be bring for optimizing products and
As a result, companies are using a range accustomed to cross-border collaboration, processes.
of strategies such as negotiating fixed medium-sized companies may be
prices with periodical adjustments, reluctant to do so. They may lack the Risk Management
implementing advanced buy /sell right timing and expertise to evaluate Although risk management is widely
processes, and setting up hedging the supply base within best-cost countries embedded into the strategies that
departments. and expand respectively. However, some suppliers use, the value of procurement
companies have gained experience in risk management is often underestimated.
Global Competition expanding their supply base in eastern It is crucial for suppliers to have a backup
Automotive suppliers have also felt Europe, and this may prove a good procurement plan in place to ensure
increased pressure from growing starting point for further expansion in business continuity, since the risk to the
competition in Asia, especially from China best-cost countries. supply chain presented by upstream
and India. At the same time, they have suppliers can be substantial.
benefited from the lower prices offered Holistic Information Sharing
by new players in best-cost countries. Certain industries and markets lend
Suppliers could seize the potential themselves to data sharing, for example
advantage of this opportunity by sourcing information regarding part specifications
from best-cost countries, which could have and stock level trends which have
the effect of driving prices down through historically been tantamount to business
low labor costs for complex parts. secrets, not to be disclosed to other
4

5. 5

6. How High-Performance Suppliers Use Best Practices
in Direct Materials Sourcing
General Best Practices Best practices include
Accenture works with several tier-one • Optimizing purchasing processes
suppliers to the automotive industry, • Understanding and consolidating
among other industries. By partnering the supply base
with Accenture, the suppliers are • Ensuring suppliers pursue the same
generally able to save about 10-15% growth strategies
of their procurement budget. Recent • Actively using brand attraction
projects have shown that despite the • Communicating and collaborating
challenging market, high-performing with suppliers
companies are investing in implementing • Sharing R&D costs
best practices that are helping them • Conducting active risk management
lead the way.
Implement a Structured They map out the amount spent with Ensure Suppliers Share Your
Procurement Process individual suppliers, analyze that data Growth Strategy
and understand the percentage of their
Leading automotive suppliers have an procurement budget that goes to each High performing automotive tier-one
optimized, structured procurement supplier. suppliers have identified suppliers that
process in place. These suppliers conduct have strategies which match their own
standardized, periodical Requests for Based on the analysis, companies growth strategy. They understand that
Quotations (RFQs) and well-prepared, eliminate suppliers off the so-called “tail some tier-two suppliers–depending
professionally executed fact-based end” of the spend list– e.g. they cut off on the size of the company and the
negotiations. Supplier behavior is those suppliers with whom they spend category of goods sourced—are not as
documented and analyzed, and the the least, considering that the parts can growth-driven as others. When scouting
data is used to award contracts and be produced at an incumbent supplier. for optimal supply partners, these
select suppliers in the future. Companies Accenture has worked with companies keep in mind that suppliers
have saved an average of 10% to 15% with non-uniform strategies can cause
on costs by rationalizing the preferred problems for supplier base consolidation,
Consolidate the Supply Base supplier list and improving compliance cost extra time for management and
with “Tail-End” Cuts or toward preferred suppliers. unnecessarily tie up resources.
Acquisitions In some cases, companies choose to
Best-in-class companies take a rigorous consolidate the supply base with an
approach to thinning out their base of acquisition of an upstream supplier that
suppliers by cutting off low-performing fits within its growth strategy. Overall,
suppliers that do not add value or, in consolidation helps achieve procurement
some cases, by acquiring small upstream targets by reducing the number of
suppliers. upstream contacts and increasing overall
supply chain reliability.
6

7. Supplier Relationship Management: Cutting off the long tail end of suppliers
Long tail end supplier reduction program
Identify Classify Implement
Supplier Classification Supplier to-be
C B A
A A B+
Supplier as-is
B+
B Supplier X Supplier Z
B-
Supplier Y Supplier Z
C
Demand type
Mapping Table
Repetitive Demand
1 time Repetitive
• Identify C suppliers by region • Classify demand pattern in • Develop supplier replacement
• Validate A and B supplier 1 time and repetitive mapping tables
structure by category • Assign demand types to supplier • Communicate list of obsolete
• Confirm A, B, C structure with classifications suppliers to requestors
key stakeholders • Communicate supplier • Block suppliers in ERP systems
reclassification and communicate
• Confirm savings by supplier
reallocation
Typically, Accenture is able to realize 10% - 15% of procurement budget savings by rationalizing the preferred suppliers
list, improving compliance to preferred suppliers/contracts, increasing procurement control over long tail of spend and
reducing operating cost
Utilize Your Brand Strategy professional relationship with their Conduct Risk Management
suppliers, constantly challenging them
Top tier-one suppliers also build upon to achieve better results and working to Finally, best-in-class suppliers actively
the power of their successful brands: develop those suppliers that show growth use risk management tools and strategies.
They actively position their brand to potential. Both parties benefit, since They operate thorough procurement risk
attract the best potential suppliers. priority business contracts may be offered management, invest in cross-functional
However, using a brand strategy functions to select suppliers in return for continuous risk management capabilities, use
best in supply-driven environments. In price reductions and reduced supply risk. predictive analytics and strive to eliminate
a demand-driven market, a tier-one risk by using a collaborative approach
supplier’s lack of an attractive brand with their suppliers and customers.
improves the bargaining power of its Share R&D Costs with
tier-two suppliers, which may shift to a Selected Industry Peers
more attractive tier-one supplier.
Another way to benefit from collaboration
is to work with other organizations in
Communicate and joint R&D projects. Top companies form
Collaborate With Suppliers alliances with strategic and non-
competitive industry peers to help share
As a key enabler for a successful sourcing the costs (and ownership) of joint research
program, top automotive suppliers and to speed up product development.
actively engage and interact with their The ultimate level of collaboration is
suppliers. They have a single contact partnering with a supplier or a group of
person in place (usually a lead buyer or a suppliers to design and develop a new
supply base manager) who understands product with a unique selling proposition.
the needs of the business and sees the Companies do this by putting to use
value of collaborating with the supply innovations in supply materials, services
base. These employees build a trusting, or processes.
7

8. From Generic to Category and
Commodity-Based Sourcing Strategies
In addition to the seven The next section of this report looks at During the course of a project, Accenture
two different approaches to sourcing works closely with the clients to develop
general best practices distinctly different categories of goods. dozens of re-usable, commodity-specific
discussed above, top- First, we examine sourcing strategies for documents to improve the client’s
electronics, which in this case means sourcing process, also aiming for long-
performing automotive simple products with a large number term improvements beyond the project
suppliers have defined of suppliers, but products with a high timeframe.
raw-material cost. Second, we look at
specific approaches for strategies best suited for molding, which
sourcing particular types is a complex product with a fragmented
supply base and high raw-material costs.
of goods, depending on
their category and the These categories – electronics and
molding – differ in the size of the
commodity materials potential supply base, supplier behavior,
used to create those and in category complexity, to name just
a few areas. Therefore, they are well-
goods. suited for illustrating in-depth a variety
of best-practice sourcing solutions.
Ultimately, the characteristics of each
good could help form a baseline for
determining the right sourcing approach.
8

9. Electronics – At a Glance
Throughout the report, Category Snapshot: Electronics
the term “electronics” Characteristics “Electronics” Category
refers to electrical Sourcing scope Globally (mainly Asia)
components such as Supply base Fragmented supply base with many
sub-categories
Printed Circuit Boards Ease of transportation Easy (small parts)
(PCBs), interconnector Part complexity Low-medium
cables and LEDs. Level of standardization High
Raw material influence Very high (e.g. Copper)
Buyer power High
The electronics category is characterized
Supplier power Low
by an abundance of suppliers that are
capable of manufacturing according to Threat of substitute products Low
a customer’s specifications. Parts are Threat of substitute suppliers High
generally of low to medium complexity
and have a high degree of standardization
(e.g. catalogue items). Tier-one suppliers with SMEs and bypassing distributors • Request RFQs regularly to gain an
are able to exploit their bargaining power may be more cost effective, even if it can overview of the current market
over their upstream suppliers due to be difficult to identify which SME to situation and identify further savings
supplier interchangeability. work with. High performers quickly opportunities. They also require that
identify the suppliers managed through their suppliers propose a minimum
Upstream suppliers increasingly respond distributors and request a direct quote number of cost-saving initiatives
to this threat by consolidating their own for comparison. This process step may per year.
upstream supply base or by building lead to direct sourcing or provide tougher • Actively manage and challenge
alliances with their peers. Relationships bargaining power with distributors. upstream suppliers to reduce the raw
between tier-two suppliers and their material content in each component
upstream suppliers are primarily focused through small design changes and
on price and only secondarily on securing Manage Raw Material Price by reconfiguring their production
supply for the electronics category. Fluctuations processes. They use best-cost country
Currently, top tier-two suppliers focus suppliers since the parts can be
on sourcing these materials from best- Electronics components are subject to switched easily and suppliers there
cost country suppliers, since they have volatile raw material prices. For instance, have lower processing costs for raw
the necessary technology and can the price of the copper that goes into materials and end products.
provide capacity as needed. cables can make up 50% of the total
part price. Best-in-class suppliers use
advanced procurement strategies to
Leverage or Go Around reduce the risks associated with raw-
material price volatility. These companies:
Capacities in the electronics market are • Negotiate fixed prices with suppliers
increasingly driven by small and medium- for a certain period, thereby
sized enterprises (SME) and to a lesser minimizing the impact of changes in
extent by large-scale multinational the price of raw materials
suppliers. Due to their size and lack of • Renegotiate the fixed prices and adjust
international sales capabilities, the SMEs them on a periodic basis (e.g. every
rely on distributors to market their month or year), depending on the
products. Distributors may charge a length of the lifecycle of the parts
service premium of up to 8%, claiming
that they received a better price for the
downstream supplier due to contract
bundling. However, negotiating directly
9

10. Molding – At a Glance
The term “molding” in Category Snapshot: Molding
the automotive industry Characteristics Thermoplatic Injection Molding
typically refers to Category
Sourcing scope Globally
products that include Supply base Fragmented, specialized supply base
thermoplastic raw with some sub-categories
materials, such as plastic Ease of transportation Easy (small parts)
Part complexity High
resin. Examples are
Level of standardization Medium-low
gasoline tanks, pistons, Raw material influence High (e.g. resin)
switches and pins. Buyer power Low-medium
Supplier power Medium-high
Threat of substitute products Low
Molding products fall into various sub-
categories, such as blow molding, Threat of substitute suppliers Medium
rotational molding, extrusion molding
and injection molding. Here, we will supplier cost structures and analyze cost the tools and switch to a competitor.
examine injection molding. Injection drivers. Yet their cost-driver analyses On the other hand, downstream suppliers
molding can require sophisticated, look at more than molding parts; they go cannot switch upstream suppliers
highly customized and maintenance- a step further to include molding tools, (granted client approval) if they don’t
intensive tools for each part, depending since effective management of such own the tools as the product lifetime
on the size of the part. Compared to equipment can be used to reduce part may not justify building a duplicate or
the “electronics” category, which is prices (e.g. through replacement or replacement tool.
somewhat easy to manage due to its high better maintenance, or by collaborating
level of standardization of parts and the on the design of a tool).
abundance of suppliers, managing Understand Suppliers’
suppliers in the molding category is more Restraints
complex. The market is supplier driven, Consider Tool Ownership
given the shortage of specialized suppliers Due to the required upfront investments
and a lack of global capacity for high High-performing suppliers understand in tooling for molding products, high-
precision molding machines. Given this that the ownership (or lack of ownership) performing tier-two suppliers understand
market situation, tier-one and tier-two of production tools should be considered the limits faced by their upstream
suppliers need to take differing supplier in a detailed analysis of an upstream suppliers, particularly SMEs. When
capabilities into account when defining supplier’s cost base for molding products. pushing for price reductions, they keep
cost-cutting measures or considering an Once these costs are broken down, they in mind that the offer of additional
acquisition. Currently, suppliers are engage with their suppliers to help those business to compensate for a supplier’s
focused on acquiring molding capabilities suppliers lower costs, in exchange for loss of profit may not help those SMEs
(e.g. machines) and developing new guaranteeing a certain volume of orders that must invest in new lines to increase
suppliers to overcome the capacity and keeping tools at the upstream capacity. (The investment would come
bottleneck. supplier. This strategy is necessary since without a guarantee for business, since
molding components require special, suppliers can easily move production to
customized tools for every type of part. a competitor.) Therefore, they look to
Calculate Cost of Tools for These tools can become a lever in price larger upstream suppliers with the
Producing Complex Parts negotiations before production starts, financial resources necessary to invest in
particularly since it is not uncommon excess capacity despite reduced prices,
Best-in-class automotive suppliers that both parties vie for possession of thereby offering more stability to the
consider the complexity and functionality the tools. The upstream supplier is at overall sourcing and manufacturing
of molding parts when they are looking the mercy of the downstream supplier process. If no large-scale suppliers exist
for ways to reduce costs. They conduct if it does not own the tools, since the or have free capacity, the growth of the
periodic supplier RFQs, benchmark downstream supplier could withdraw tier-two supplier is limited.
10

11. 11

12. Risk Management as a Basis for
Procurement Best Practices
Companies typically The most common and volatile areas of In addition, they keep upstream suppliers
procurement risk are upstream supplier of complex products from gaining too
underestimate the impact reliability and price fluctuation. Therefore, much bargaining power by building
of risk on procurement top companies anticipate upstream loyalty with bundled business contracts
supplier risks, both financial and and awarding related business (such as
performance. logistical, and protect themselves with a stamping contract for pins along with
contingency plans. They build strong an award for parts molded around that
supplier relationships that may even metal pin).
Nevertheless, the focus include an offer of replacement business
has returned to proactive if contracts are moved unexpectedly.
risk management as a
result of the recent
economic downturn.
12

13. The “Master’s” Approach to Procurement Risk
Management: A Study by Accenture and MIT
Research into procurement risk management conducted by Accenture and
the Massachusetts Institute of Technology identified several leading practices
for successful procurement. The two partners surveyed 127 chief procurement
officers at global, industrial companies around the world.
The research showed that procurement “masters” avoid price volatility and
use external data to support their risk analyses. And they do so without over-
investing in IT for procurement risk management. Finally, “masters” excel at
anticipating, monitoring and mitigating risks in a variety of ways.
Risk Anticipation Capabilities Risk Monitoring Capabilities Mitigation Capabilities
Masters typically: Masters typically: Masters typically:
• Differentiate their procurement risk •Identify and assess the level of risk at • Integrate the organization in case of
strategies based on the category of key stages of the strategic sourcing incident of mitigation plans
goods they are purchasing process • Develop a process to measure the
• Maintain regular contact with • Use external data sources to monitor impact of incidents and alerts, to
suppliers and use multi-vendor the supply market, the financial continuously improve risk management
sourcing, in order to react quickly in viability of suppliers, and other trends • Emphasize development of mitigation
case of supply chain disruptions in the market plans for critical key suppliers
• Apply engineering expertise to consider • Adapt monitoring approaches to
alternative production materials different categories of suppliers,
• Use risk sharing clauses in contractual according to geographic and cultural
agreements influences
• Employ predictive analytics to build • Monitor key risks with critical suppliers
cost structure forecasts and create at each step of the supply process
scenario plans about raw-material • Collaborate and integrate with key
price fluctuations suppliers and agree on “early warning
systems” for supply chain disruptions
Please refer to the Accenture Study “High Performance in Procurement Risk Management” (2010)
for further details.
13

14. Conclusion
Accenture’s experience Technological complexity is increasingly With trustful relationships, upstream
seen as the main differentiator for suppliers may even help their downstream
with Direct Material supplier selection: Best-in-class suppliers partners choose raw material mixtures
Sourcing suggests source low-tech parts with a focus on that will improve quality and reduce
cost from upstream best-cost country prices.
that suppliers should suppliers, assembling parts locally. They
collaborate more to manage a supply base for complex parts Finally, leading suppliers actively manage
in western countries, allowing some risk in the procurement process. They
successfully navigate upstream suppliers to be involved in anticipate and react quickly to changes
future markets and component design. Leaders also strive to in the market and develop non-exploitive
closely involve all parties in the supply relationships with suppliers to improve
reap the benefits of chain through information sharing. This their cost-benefit ratios.
globalization while creates transparency and opportunities
for process improvement. By implementing these proven best
operating a sustainable practices, companies can operate a
supply chain. In addition, efficient raw material sustainable supply chain – and gain a
management strongly contributes to a competitive edge.
supplier’s market share, and some
suppliers benefit from their global For more information about how
proximity to raw material mines. Accenture can help your purchasing
Companies are advised to secure a department become a driver of high
supply of raw materials for the long performance, please contact the authors.
term, balancing that cost with the
resources needed.
14

15. About the authors
Florian Kache Lars Bettermann Ralf Mägerle
Florian Kache is a Consultant within Lars Bettermann is a Senior Manager Ralf Mägerle is a Partner at Accenture
the Operations Practice of Accenture in Accenture Management Consulting. and is leading Accenture’s Sourcing &
Management Consulting. Specializing He is based in Cologne, Germany, and Procurement Management Consulting
in Sourcing & Procurement he has has vast experience in the Auto- and Practice in Austria, Switzerland and
profound experience from international Industrial Equipment industry. His Germany. His last 19 years he spend in
projects within the Automotive, main focus is on challenges within Sourcing & Procurement helping clients
Chemicals, Communications & High Sourcing and Procurement such as in several industries becoming high
Tech industry. During the last 5 years Global Strategic Sourcing, Procurement performing in Procurement. Based in
he worked successfully on various Transformations and Process Excellence. Zurich, Switzerland, he can be reached at
projects focusing on Global Strategic During the last 12 years he has gained ralf.magerle@accenture.com.
Sourcing, Procurement Transformation, experience both in consulting as well
and Carve Out Transformation in as industry and has lived abroad
M&A divestitures. Based in Frankfurt, several years. He can be reached at
Germany, he can be reached at lars.bettermann@accenture.com.
florian.kache@accenture.com.
This document is produced by Accenture as general
information on the subject. It is not intended to
provide advice on your specific circumstances.
If you require advice or further details on any
matters referred to, please contact your Accenture
representative.
15

16. About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with approximately
236,000 people serving clients in more
than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive research
on the world’s most successful companies,
Accenture collaborates with clients to
help them become high-performance
businesses and governments. The company
generated net revenues of US$25.5 billion
for the fiscal year ended Aug. 31, 2011.
Its home page is www.accenture.com.
Copyright © 2011 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.