Case Studies - Promotional supply optimization; procurement transformation

Dragon Sourcing - 龙 源 Your Tailored Sourcing Approach to China

CLIENT XXX Promotional supply optimization; procurement transformation – Case studies

Case Study – Beverage Company Background Client is a major western alcoholic beverage company experiencing significant year-on-year sales growth in China resulting in ever increasing marketing and promotional budgets. Client was concerned that the spend with external marketing suppliers was not optimized and that world class sourcing practices were not being applied

Results

Approach • Created multi-functional team with representatives from marketing and DS buyers • Selected pilot categories to test opportunity associated with deploying world class sourcing processes (glass and metal products) • Drove strategic sourcing process on selected pilot categories: • Developed list of qualified suppliers for both technology segments through and RFI process • Run RFQ process with short listed suppliers to select preferred partners • Negotiated final frame contracts agreements • Reviewed current procurement processes, organization and systems © 2005 Dragon Sourcing. All rights reserved.

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• Fundamentally changed sourcing strategy: • from brand segmentation to technology segmentation • from « spot » buying to frame contracts • from « creative agency » to « direct » • Negotiated between 40 and 50% cost reduction on pilot categories • Changed sourcing processes and organization • using Procurement Service Provider • appointing dedicated internal resources

The scope of the project was about RMB 16 M for glass and stainless items

M RMB 18.0

Extra products in scope: - 2nd brand - More items in scope for brand 1

Current Scope RMB 15.8 M

16.0 14.0

Other 1.0

1.0

Direct Negotiation

Mixed 1.4

1.4

PO Already Placed

13.4

Through RFP

12.0 steel 10.0

RMB 9.0 M

5.4

8.0 CR Ice Bucket 6.0 CR Tray

4.0

glass 8.0

CR Glass

2.0

CR Jar

0.0 Initial Scope

Š 2005 Dragon Sourcing. All rights reserved.

per Brand

3

per Technology

per Renegotiation channel

Some products involved

Š 2005 Dragon Sourcing. All rights reserved.

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We followed the following approach over a 3 months period

Overall approach

M O B I L I Z A T I O N

Assess practices and procedures

Spend & needs analysis

• Communication to suppliers

Implementation plan

Negotiation strategy

Strategy execution

• Specs, volumes, prices, etc.

Current supplier analysis • Scope and history

• Agency vs. manufacturer

Supply market analysis • Kick off meeting

Process and org. recommendations

• Technology segmentation

• New supplier identification

• Short vs. long term contract

• Tender document

• Leverage back opportunities

• RFI/RFQ process • Benchmarking © 2005 Dragon Sourcing. All rights reserved.

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• Negotiate • Contract

We followed a rigorous supplier selection process

Initial supplier list building

• • • • •

Internet Industrial association Chamber of commerce Private networks etc

Suppliers selected based on

• • •

Technology capabilities Web Products display References

© 2005 Dragon Sourcing. All rights reserved.

Suppliers selection

Short listing

through

suppliers for

RFP Process

Final round

• • • • •

Intend to respond Confidentiality Agreement Quotations Catalogues Samples

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• • • •

Responses quality # of quoted items Pricing Supplier assessments through visits

Select final suppliers

1-3 selected Suppliers

• Organize face to face meetings • Request “last and final” quotation • Communicate with short listed suppliers on selection process and criteria and current competitive positioning • Analyze final quotes • Final negotiations and contracting

The initial supply market scanning generated 300+ suppliers

www.alibaba.com.cn www.google.com www.made-in-china.com Steel Suppliers 39%

ww.ywbb.com www.glassnet.com.cn www.asiaglass.com.cn www.glassinfo.com.cn www.glassbuy.com.cn www.wjw.cn cn.easthardware.com Industrial association Chamber of commerce

Glass Suppliers 61%

Manual Catalogue

Initial 300 suppliers: Glass: 183 Steel: 117

Initial supplier list building

Š 2005 Dragon Sourcing. All rights reserved.

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Suppliers selection is based on criteria such as technology capabilities, products display on web and direct data checking, and update a Dragon Sourcing commodity map of China per region database for further quick references -Flat glass vs. hollow glass, - Kitchen related items vs. industry hollow glass - etc.

Updating Chinese industry mapping

Suppliers first screening

300 suppliers

1 3 3

3 3 1

1

11

8 Commodity 1 Commodity 2 Commodity 1 & 2 Technology capabilities

Products display Data checking by on Web calling

Š 2005 Dragon Sourcing. All rights reserved.

8

9

4

3

Bilingual English - Chinese RFP was compiled jointly by Dragon Sourcing and client

• Content: approved jointly by Dragon Sourcing and client • Technical design: approved by design department of client • Legal agreement: approved by legal department of client

© 2005 Dragon Sourcing. All rights reserved.

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The RFP process demonstrated that the client’s current sourcing strategy had not been optimized

Glass quotation analysis (12 suppliers quotation) Preliminary savings analysis Current price

Average quoted

Max quoted

Min Quoted

• All quotation received are below current paid prices • Considering all Min per item, global savings reaches: 78% • Considering all Max per item, global savings reaches: 16% • Considering all Average per item, global savings reaches: -52% • First ranked supplier quoted all 7 items. Global savings reaches: -75% • By Combining supplier ranked 11 and supplier ranked 12, global savings reaches: -32% • Current supplier quoted all 7 items without the trading agency.

Global savings reaches: -37%

60.00 50.00

RMB/unit

40.00 30.00 20.00 10.00

Special facts • Machined process glass are usually 30% less than manual processed. Further investigations have to be conducted regarding quality and process control

0.00

A

B

C

D

E

F

G Items

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Glass suppliers ranking highlights savings opportunities from 40 to 70% Price Competitiveness

Suppliers

Quality and timeliness of response

# of Items quoted

Western company

Type of grading

1 to 5 (1)

# out 7

Y=1/ N=0

Weighted

15%

25%

15%

Savings vs. base line on quoted items

RMB

%

Ranking

Supplier Profile

Overall rate

1 to 5 (1)

1 to 5 (1)

Rate base 100

35%

10%

1

Supplier 1

1

1

0

-2 575 000

-74%

5

44

2

Supplier 2

1

1

0

-2 400 000

-69%

5

44

3

Supplier 3

3

4

0

-2 182 600

-33%

3

51

4

Supplier 4

3

4

0

-3 633 300

-55%

4

58

5

Supplier 5

3

7

1

-2 858 900

-36%

3

69

6

Supplier 6

3

4

0

-2 221 100

-34%

3

51

7

Supplier 7

3

7

1

-3 222 150

-40%

4

77

8

Supplier 8

3

4

0

-4 357 520

-66%

5

65

9

Supplier 9

4

4

1

-2 148 260

-33%

3

57

10

Supplier 10

4

7

1

-5 982 230

-75%

5

87

11

Supplier 11

4

1

1

-1 420 000

-41%

4

49

12

Supplier 12

4

3

0

-394 200

-28%

2

42

(1): 5 = Very Good; 1 = poor

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Finally, the program resulted in the client fundamentally changing its sourcing strategy Strategy element

Current Client strategy

Recommendation for the future

Rationale

Creative agency vs. manufacturer

• Creative agency

• Direct to Manufacturer

• Agency not competent in procurement but in creation • No incentive to optimized total ownership costs • Very high commission fees (over 20%) • Negative taxes impact • Direct link with Manufacturer provides better cost / quality optimization at design stage

Technology segmentation

• Per Brand

• Per technology (Glass, steel wood, leather, etc.)

• Consolidated volume to a reduced supplier base

Contracting

• PO Driven

• Annual, frame contracting

• Simplify ordering process • Agree key contractual issues (payment terms, tools ownership, etc) • Provide suppliers with better visibility into client requirements • Intellectual property

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