The

New Global Supply Footprint A Generational Change Opportunity

Discussion Paper

April 2012 Mario A. Adamo Lead Principal

Global Supply Footprint A Generational Change:

AVA Consulting Partners believe there is a generational opportunity to take advantage of quantum global economic changes in the global supply footprint (GSF). There has been a generational redefinition in the GSF for almost all manufacturing. The GSF for manufacturing has been redefined with a large shift from Western Europe and US to China and Asia over the last 15 years. This shift has manifested predominantly from the diverse and significant investments in Asia to build manufacturing facilities and provide high quality manufacturing capability development programs driven by the Germany, France and Italy. This manufacturing capability investment has not only been in consumer products, but also heavy industrial products. The key benefit of the redefinition of the GSF has been the impact of reducing the TCO1 of most manufactured items by as much as 50% over traditional European and US based OEMs. These TCO reductions have been driven by 3 factors dominant in the emerging economies: a) World class capital efficiency; b) Labour market arbitrage and; c) Labour productivity benchmarks.

1 TCO: Total Cost of Ownership an approach that totals all cost elements from item inception through to disposal. 2

Any company can immediately take advantage of the redefined GSF for all of its major capital asset designs and acquisitions including major capital equipment. The impact of design on the TCO of a capital asset is often discussed but rarely addressed in a capital effective manner. Recently, many capital- intensive industries have applied Design For Value (DFV) techniques with more transparent suppliers in the new GSF that apply a mindset of developing designs to meet a need rather than a want. Not surprising there have been examples where such techniques have been applied have delivered reduction of 15% to 35% in the purchase price and ongoing spare parts costs. Recently work at a major rail corporation on wagons revealed DFV savings of 23% by reviewing design and material specification of both of the bogie and body. The sourcing from the redefined GSF can be successful using a traditional RFx approach, however to obtain sustainable reliable lower cost items with a minimal increase in risk it is highly advisable to combine procurement from the GSF with a clean sheet fact based (CSFB) sourcing approach. This will ensure that in this brave new world of sourcing that there is as much transparency of what a capital item should cost. By understanding all factors at a very detailed level the buyer can turn the table on suppliers in any negotiation, especially in the procurement of highly complex capital items. Recently, we have seen this deliver 45% savings in the acquisition price of heavy mobile equipment for an Australian large mining company.
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The challenge with spare parts acquisition has typically been the complete lack of transparency on OEM parts cost make-up and the inability to utilise non-OEM without voiding warranty. With the advent of new suppliers in developing countries there is a significantly higher degree of transparency of cost drivers and openness to entertain discussion around cost. As in the case of initial acquisition there is significant savings to be made on both OEM and non-OEM spare parts by use of sourcing from the GSF combined with a CSFB approach to sourcing. Work done recently in the oil and gas industry recently using this technique has produced average savings of 28%. All companies can capture cash on offer from design, purchase price and spare parts by tapping into the redefined GSF combined with CSFB sourcing process.

About the author

Mario A. Adamo Lead Principal

Mario is considered an expert in Procurement, Supply Chain and Capital Efficiency practices with 21 years of experience as a consultant and corporate executive in many industry sectors. Mario worked for 5 years at McKinsey&Coy in Chicago, Asia and ANZ in the strategy and operations areas. In Chicago at McKinsey, Mario led a global initiative to drive best practice fact based procurement capability building in clients. Recently, Mario has also held CPO roles based in Shanghai (BlueScope Steel) and Australia (QRNational) in addition to senior operational roles at Fosters Brewing and General Motors. Recently Mario developed the CSFB (Clean Sheet Fact Based) negotiation workshop approach to strategic sourcing.

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