Maximizing Procurement Efficiency: Harnessing Collaborative Data Insights

Emily Matsco: Hi everyone. We are going to be talking about maximizing procurement efficiency in this presentation today, and really what that means and what we will focus on is cost outlier analysis using aPriori and the aP analytics tool. My name is Emily Matsco, and I am a Senior Expert Services Consultant with aPriori and have been for almost three years now. So to introduce this topic, we are going to start with when to conduct an outlier analysis and what use case, we are really going to be using these tools for. Then I will move into how to identify cost outliers with AP analytics and what that looks like pretty much step by step. And then we will wrap up with conclusions and next steps in this process. So when do we use outlier analysis? Typically outlier analysis and what we are really talking about is that sourcing use case. So when you want to eventually go and negotiate with suppliers based on outputs from aPriori, that is when we are going to use an outlier analysis.

Procurement Process

EM: And at what stage? So we are going to have… We have the supplier quote, we have the aPriori should cost, now what? And that now what is where the cost outlier analysis really lives. So you do want your supplier quotes first so that you can compare them and then you want to go through your aPriori should cost analysis. And typically we recommend that you have at least 20 to 30 parts costed with the supplier quote before going through this cost outlier analysis. Because finding strong cost outliers can be a bit of a numbers game. You certainly do not need that much more than the 20 to 30, but obviously, however much data you have available is great. And so when we walk through cost outlier analysis, what we are really doing is identifying the strongest candidates for negotiation in that sourcing use case. So again, we have our supplier quote already, we think we can do a little bit better.

Cost Savings

EM: We have done our aPriori should cost, and now we move into our cost outlier analysis to decide maybe where to start with negotiations or what part numbers to start with, what suppliers to target in negotiations and what parts are actually going to make for a strong conversation. And actually, see a lot of cost savings coming from that negotiation. And so to start, hopefully this looks familiar to most folks, but when you are identifying cost outliers, we do have an out of the box report in AP analytics, and I always recommend just starting with that to get a picture of the set of parts that you are looking at. So this is a smaller subset just to kind of to demonstrate in this entire process of parts.

EM: So in this case I have a set of sheet metal parts. You go into aP Analytics and all you have to do is run your cost outlier identification on this set of parts. What you are doing there is really just comparing the quoted cost to the should cost and the delta between it. So prerequisites for the parts costed in aPriori that you then run this report on. It does have to have a quoted cost already in there, saved under the quoted total cost section in aPriori. And of course we need successful should costing as well. And again, this will highlight just your cost outliers, your parts with a significant amount of savings for the year based on the annual volume you put into aPriori. So this one is showing we have a… This part on the left is going to be over million dollars in potential annualized savings and so on and so forth.

Procurement Strategy

EM: And then we kind of get to the right side and we see parts with maybe less opportunity. So we know we probably want to target to the left side of this chart and those part numbers. And then this report will also show us, the percent difference between the quoted cost and should cost for all of our part numbers. So what this will show is, for the same list of parts, what is the percent difference and why this is really helpful is when you’re identifying outliers to go and then negotiate with suppliers, you want to make sure there is a strong enough percent difference between the individual part cost of two parts to actually have a productive conversation with your suppliers. So as an example, if you see a part with a million dollars in savings but you are only seeing a 2% cost difference between that individual part, you are just sourcing it at such a high volume that that is still contributing to a large, annualized potential.

EM: That is probably not where we actually want to start, because if you only have a 2% difference between the piece part cost and your quoted cost, you are really haggling over pennies on the dollar with your supplier. And that is not as productive as some of these conversations where you see a 10, 20% difference. And so looking at these two charts, this is the output of the cost outlier report out of the box from aPriori. So again, we want to start with looking at our annualized potential savings and make sure that that is substantial enough that it is going to matter to our corporation. And then the percent difference to make sure that yes, that annualized potential savings is coming from a distinct difference between the quoted cost and should cost and not just quantity. So as an example here, if we are looking at it, we see this like on a big bump in the percent difference chart.

Supplier Relationships

EM: And what that is showing us is that these three parts actually have a really, really strong percent difference, like 40 to 80% range cost difference between the quoted cost and should cost. But if we look at the chart above it, these are also contributing almost $0 in annualized potential savings because they are probably a low annual volume and a low cost per part. So we could probably make a compelling case for negotiation. Is the payoff really worth it? Because again, we are haggling over pretty small dollar value there. The good news is kind of on the left side here, some of our heavy hitters are high annualized potential savings parts also have a strong enough cost per percent difference per part to actually go and negotiate. So this tells us, this bracket form kind of all the way on the left on both reports… Or sorry, both charts, that is probably where we want to start. We have a 40% difference between costs and we also have over a million dollars in potential savings.

EM: So after we have done that, that gives a really great starting point for what is just some of our strong deltas between quoted and should cost that we want to initially address with our suppliers. Taking that a step further, we can use what we call a conversion cost per cycle time analysis. And this is also going to lean heavily on the quoted cost and will actually be a custom report to create in our AP analytics tool. And so what we are doing and what I am talking about with a conversion cost per cycle time analysis is we are going to filter parts based on process group and machine size. And what that does is it equalizes for two things, labor rate and overhead rate. So if you have a set of parts, you know are or can estimate should be made on the same machine size, then you know that you should be getting roughly the same rate per cycle time for that processing cost.

Quoted Cost

EM: And that is what we are really going to start digging into is, okay, we have these parts, we have a quoted cost and aPriori has actually estimated the cycle time and machine size for us. So based on that subset of parts that are made on the same machine in general, what is the quoted cost? So the cost given to us by the supplier, divided by the cycle time aPriori has calculated, and that gives us kind of almost an equation for how some suppliers will be quoting because they’re going to take the process cost of a part or some process cost per second or minute or hour kind of including overhead and labor in their calculation. And so that is what we are going to do too. When I talk about parts on the same machine, they have to be, again, same process group, same machine is really important, and also the same machine for your primary operation.

EM: So as an example, if you have a laser cut bend break part, if laser cut is 85% of the cost contributor, which aPriori also tells us that percentage, then that is the machine you want to equalize for. If you have a part that’s high pressure die cast and then heat treated, you are not going to compare the heat treatment cost per cycle time. You are going to compare the high pressure die cast cost per cycle time, because that is going to be the major cost driving process. So again, once we kind of narrow down that scope to just parts with the same process group and machine, we want to isolate processing costs. So again, what this allows us to do, this conversion cost per cycle time is really hone in on what is the actual cost per the amount of time it takes to make a part without considering other parameters like material costs.

EM: So we are going to take that quoted cost that the supplier has provided and subtract material costs and the associated material margin. And what that does is it isolates the process cost of just making this part, because material cost is going to be something a little bit harder to negotiate on in the future. And then kind of once we have this part cost minus material cost, it is kind of highlighted right here, we are going to divide that by the cycle time output by aPriori. And so now we have an estimate of cycle time and how long it takes to make a part. And we also have the quoted cost. So again, the part cost minus the material cost of the calculation listed above, divided by cycle time multiplied by a hundred to get this ratio of just process cost to cycle time based on the quote.

Identifying And Comparing  Outliers

EM: And you will get a chart that looks like this. And this is kind of the goal for identifying outliers is we want to take a look at, okay, we have this set of parts, this is now a smaller set of parts than what I showed in the original cost outlier report because we have now narrowed it down based on machine. So all of these parts are made on a water jet cutter, three thousand millimeters by 1600-millimeter bed size. And that’s kind of that primary process again. So water jet cut in this case is contributing well over 80% of the cost for processing these parts. And we have our conversion cost per cycle time, which is really just a ratio of that quoted cost minus material cost divided by cycle time. And you can immediately see these two are really strong outliers. And what that means is the algorithm that our supplier is using to quote this set of parts is not consistent and we want it to be right.

EM: So we want to start comparing these outliers to these lower conversion costs parts and say, well okay, why are we seeing, AP 234 and that quoted cost is a much higher cost per just the amount of time it takes to make the part than say 232. And so you can easily kind of find an average or what’s average between all of these and go to your supplier and start negotiating that out, because now we are talking about things like overhead rate, which includes, just running a factory and all of the costs associated with that. And you can really start to dig into, okay, how do we address this gap between these two parts or even these two parts? And what type of savings does that get us? Because again, this is highlighting that the supplier’s algorithm for calculating these parts or these part costs when they are providing you a quote are not consistent. And really what we want is that consistency across parts.

The Two Main Methods

EM: So again, we are not accounting for material, so we are not haggling over material cost, which is very highly market driven. We are just talking about their quoting practices and what is driving kind of a higher cost per time for some of these parts. And then from there you can start negotiating these and start to really dig into the details. And so those are the two main methods that I use to identify strong cost outliers before going to the negotiation stage. So in conclusion, again, we are going to, the steps for this are collecting a supplier quote cost your parts in aPriori. So you have to have a good should cost and a good, quoted cost to compare it to and then go through your outlier analysis.

EM: So start with the easy out-of the-box solution aPriori already offers and our aP Analytics platform, look at your cost outliers and their percent difference and then go through and look at your quoted cost per cycle time to really start to narrow in on where the gap is coming from with your suppliers. And then of course the last step is going to be to negotiate, and if you would like to learn more about how to use these outliers in a negotiation, some of my other colleagues have presentations on negotiation best practices and how to see the best results from that.