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chase decisions ?Most cost reduction is negotiation driven, rather than totalcost driven Context Some elements of strategy ?Performance specifications “fit for use” ?Inhouse involvement (make vs. buy) ?Supplier discovery ?Sole source vs. multisource ?Contract type, pricing and duration ?Joint cost elimination (transportation, inventory etc.) Composition of sourcing teams ?Cross functional with participation and support from all areas (purchasing, plant, engineering, marketing etc.) and by modity THE TOTAL COST OWNERSHIP (TCO) FRAMEWORK HELPS IDENTIFY COST LEVERS BEYOND PURCHASE PRICE Production capacity Transportation Inventory carrying costs Warehousing Purchasing administration Factory yield RD Damaged product Specifications Warranty expediting Internal and joint levers ?Change specifications ?Load schedules into supplier scheduling system via EDI ?Involve suppliers in design/reviews ?Analyze supplier?s TCO to identify costreduction opportunities ?Evaluate yield improvement potential from alternative specifications ?Consolidate part numbers to build scale Purchase price Traditional Purchasing Levers ?Identify new suppliers (local and global) ?Include nonperformance penalties (., missed deliveries, nonconforming parts) in contracts Illustrative action areas KEY MESSAGES I. Superior operations drives value creation II. Indian manufacturing panies face significant operations challenges III. New tools and mindset required to build operational excellence IV. Rewards from pursuing operational excellence can be large – the journey must begin now EACH AREA CAN HAVE SIGNIFICANT IMPACT ON PROFITS AND VALUE CREATION Revenues Per tax ROIC EBIT Costs Invested capital Working capital Fixed assets : Levers Range of impact possible based on McKinsey experience Pricing management ? 26% increase in return on sales Key account management/sales force effectiveness ? 530% revenue increase Channel management ? 1020 percentage points increase in market share 1 2 3 Purchasing cost reduction ? 1015% reduction in purchase costs Manufacturing effectiveness and overheads cost reduction ? 20% reduction in manufacturing costs ? 2050% reduction in downtime and defects ? 8090% improvement in supply reliability ? 20% reduction in overhead costs 4 5 Supply chain management ? 3050% reduction in inventory ? Stock outs nearly eliminated with 13% increase in sales 6 SET AGGRESSIVE ASPIRATIONS FOR OPERATIONAL EXCELLENCE Source: McKinsey Performance parison/gaps Com pany Process effective ness Process efficiency Factor cost Best petitor bench mark Other Material Capital Personnel 100 15 – 25% Best of best bench mark 35 – 40% Theore tical limits 60 – 75% EVOLUTION OF THE