Vendor Management In FMCG Companies

1. Vendor Management In FMCG Companies K.S.Srinivasa Murty 17th July 2004

2. Agenda • Changing role of purchasing, its implications to purchase strategy and vendor management practices • Reinventing Supplier Relationships

3. Changing Role of Purchasing Function Period Business EnvironmentRole of Procurement 1970’s Under Developed Markets Focus on availability Severe import restrictions & best Price 1980’s Developing Markets Focus on quality Easing of import restrictions Improvement & Economic Growth Inventory Management 1990’s Liberalization Focus on SC Efficiencies Increased Competition (JIT,VMI), ISO 9000, reduction of Total system cost 2000s Global Competition Focus on elimination of Defects (Six Sigma) Bottomline Growth Driver

4. Earlier Current Objective 1 Cost Competitive-ness Business CompetitiveAdvantage Focus 2 Price & Operational Costs Value Creation for the firm 3 Skill Buying and Operational Control Supply Market Strategist Changing Role of Purchasing Function Now a days - Much Different and More Difficult Role

5. Adopt A Segmented Purchasing Strategy(SPS) • SPS Provides a framework to redirect purchasing resources in a strategic way so as to maximizes economic gains while minimizing risk.

6. High Exposure to Market Risk Low Low Economic Opportunity High

7. Segmented Purchasing Strategy Deep understanding of - • What We Buy & • Supply Market Establish - • Right Positioning Right Positioning High Strategic Alliance Critical items Critical/Unique Bottleneck items LAB PerfumesEnzymes Technology/ Market Constraints (Market Risk) Leverage Scale Commodities Decentralize Nuisance items Soda ashpackaging SaltMinerals High Impact on Business Economic Opportunity Example : Fabric wash products business

8. The specific vendor management approach depends on whether the vendor supplies critical items or bottleneck items or commodities.It is important to develop strategic partnerships with vendors of critical items and bottleneck items.

9. The Strategic Vendor Management Aims At Win-Win through ….

10. Consolidation • Leverage on scale for materials by rationalizing suppliers and concentration of volumes with a few, capable suppliers. ( Conformance to CSR - Corporate Social Responsibility) • Build Strategic Alliances with key Vendors - Long term view.

11. Consolidation • Leverage Strategic alliances to facilitate successful rollout of innovation process and contain costs • Transparent profit sharing with suppliers. Transparency through common understanding of the cost drivers through agreed cost models and providing a fair return to the vendor. • Win- Win - share knowledge, grow together, with fair returns.

12. Consolidation / Strategic partnership : An illustrative example of Perfume purchase at HLL • Globally 4 vendors selected. • These vendors are assigned to different business categories - 2 vendors to each category. • The Guardian and the challenger. • Both the vendors allocated to a business category work closely with the business group, they understand the products/ customer likes & dislikes ( do own market research), invest in research and relevant technology.

13. Coordination • Synchronize the full range of supply chain activities of the supplier and the customer. Integrate their operations where ever feasible, while eliminating duplication and waste in areas such as order processing, materials planning, inventory management, distribution and transportation. • This is the point at which companies using Strategic Vendor Management do supplier quality certifications, so that receiving can be streamlined and inbound inspection eliminated. They also shorten their delivery lead times as much as possible to reduce costs and enhance flexibility.

14. HLL’S Vendor Network Management approach: • Regionalized supplier base • quick response to changes in plans • close interactions with units • Vendor Managed Inventory (VMI) system between unit and supplier ( for packaging materials only ) • Involvement of suppliers at launch / Product packaging development stage

15. VMI Systems have helped reduce delivery lead times and improved flexibility. • One supplier allocated to one unit • Unit shares plans, stocks and weekly production with supplier • Supplier plans replenishment based on the available information Benefits Achieved in some of the packaging materials : Reduction in lead times by 2 weeks reduction in stock levels by 2 weeks

16. Supplier Connectivity Purchasing Factories Supplier Net Suppliers Banks Not yet implemented

17. Leveraging Information and Communication Technologies • Effective use of reverse auctions for standard ( not custom made) materials. • Supplier net for transparent communication between factories, buyers and suppliers. ( Implementation in progress) • Use of internet for Collaborative product development and to send the suppliers purchase orders / indents, transport documents,QC reports etc.

18. Cooperation • Enhanced cooperation particularly in product development, manufacturing and logistics. Customers and suppliers work as an integrated team to leverage their combined knowledge. • For example, together they can redesign the component parts of a product in order to reduce production and assembly costs, or closely coordinate new product introductions to minimize start up costs and to assure a fast learning curve.

19. Pursue where appropriate with focussed suppliers, upgrading manufacturing and QC facilities. • While setting up new vendor capacities, where relevant, participate in machinery / technology selection, leveraging in -house / parent company knowledge.

20. Work closely with suppliers and pursue Value Analysis / engineering. • Kaizen productivity improvement techniques for cycle time reduction and in process inventory reduction.

21. Work with suppliers’ suppliers where appropriate to ensure right quality and cost • Capitalize scale economies by working with feedstock suppliers (paper,polymers etc) to your suppliers, to get competitive costs • Maximize the fiscal benefits

22. Conduct periodic vendor rating. Some of the key criteria are - on-time deliveries, quality ( Level of rejects), SCORE contribution level, improvement in order processing lead time ( responsiveness) and contribution to innovation projects etc. • Conduct regular supplier audits, linked to specific concern areas / vendor rating reports. • Motivate , recognize high performance of vendors - “Star Suppliers”

23. Managing Synergy in Multi - Profit Center / Multi Locational Companies, through ….. • Harmonization of specifications across regions bringing common materials across different businesses under a single buying system • Global / Regional buying - aggregation of regional / global volume wherever possible. • Strategic vendors are identified keeping in view their ability to become global or regional vendors.

24. Managing Synergy in Multi - Profit Center / Multi Locational Companies, through ….. • Establishing “Lead buyer” for each category of materials to fully exploit synergies across business categories / regions. • Single face with suppliers • Aggregation of volumes to get cost benefits • Using common cost systems • Quick rollouts of best practices across regions/ businesses.

25. Suppliers are “value levers” - focus on using supply markets for both innovation and cost reduction.