Our client was a multinational medical devices manufacturer who had decided to outsource a significant proportion of their procurement function to a third-party service provider.
The client had already identified potential service providers, gathered their inputs on how best to outsource procurement through an extensive RFI and reference calls, and shortlisted preferred vendors.
nVentic were brought in to provide expert advice to help the client achieve two tasks:
- Create an RFP that would ensure that bids were comparable and minimize opportunities for scope creep
- Draft a contract that could form the basis of the future relationship to a sufficient extent that it could be included in the RFP
While the client had an extensive team of procurement professionals working on both the RFP and the contract, they had no in-house resources with actual experience of putting together or operating such an outsourced arrangement.
nVentic has deep expertise in just this type of outsourcing contracting, from both a client and vendor side. This enabled us to add significant value to the client in a number of ways:
- Creating a commercial structure that incentivized performance without driving the wrong behaviours and allowed both parties to benefit from strong performance
- Helping the client to understand the benefits and risks of the principle commercial models: input vs output vs outcome based
- Creating a contract that gave the client certainty of cost over multiple years, while retaining flexibility for the inevitable changes that are likely to occur
- Advising the client on various pitfalls that typically plague such contracts when not put together well
- Helping the client to understand how the service providers function and what incentives would generate the right behaviours
- Creating an RFP that was sufficiently prescriptive to facilitate comparison of responses, while allowing different vendors to propose different approaches
- Helping the client to understand the risks and benefits of different transition approaches: lift and shift vs transformation
- Advising the client on what was most important when it came to the Service Level Agreement and the weighted scorecard for assessing RFP responses
nVentic worked directly with the CPO as well as the project leadership and gave them the benefit of objective third-party and deep experience of many such outsourcing contracts.
This allowed the client to run the RFP, select their preferred vendor, with the most important contractual elements already fixed in advance.
Our client, a major European industrial company, wanted to reconfigure its network to minimize its carbon footprint and optimize costs. It engaged nVentic to help it identify the best strategic alternative and develop an investment proposal to support it.
Context
Our client was winning market share in a steadily declining market which had over-capacity. They wanted to rationalize their operations: minimizing their carbon footprint while maintaining safety and quality.
A shortlist of plausible scenarios had been identified, but an internal analysis had shown no clear optimum target network.
The scope of the project encompassed multiple business units and geographies.
nVentic was engaged to:
- Focus on the pre-identified scenarios and their main variants
- Develop a fact-based and quantitative framework to identify a preferred solution acceptable to all
- Produce an investment proposal for the board, including a thorough cost/benefit analysis
- Draft an implementation roadmap
Approach
nVentic started by defining the main variants, including both the distribution as well as the production network.
We then listed the relevant criteria and constraints for the different options, which included:
- All regulatory and health and safety considerations
- Flexibility and resilience to disruption
- Facility sizes, capacity and potential for expansion
- Labour issues, including cost, productivity and union relations
- Age of plant and equipment
- Freight requirements and cost
- Ownership of sites and resale value
- Social costs of closure
Data was collected and processed to facilitate side-by-side comparison of each option.
Once a prefered scenario was identified, nVentic developed an investment proposal, including:
- The amount of the investment
- Internal rate of return
- Net present value
- Sensitivity analysis
- Risk analysis
Finally, a high-level implementation plan was developed.
Results
nVentic’s analysis showed a clear optimum solution with which our client’s management team agreed across sites as well as at headquarters.
It was decided to consolidate production sites but open additional distribution sites to maintain customer lead times.
The favoured solution involved a slight increase in transport, although more opportunities to use non-road transport modes. There were also economies of scale in production, making production significantly more energy efficient.
Furthermore, the preferred option presented more flexibility to expand and vary operations.
Cash flows were modelled for all sites in scope as well as for the group as a whole.
The financial comparison and business case were very sensitive to future operational costs, both one off and recurring, and these were examined in some detail.
A two-year implementation plan was developed, agreed and subsequently implemented.
Would you like to talk to one of our experts? Contact us
Our client was concerned about its reliance on a small number of suppliers for a key class of components in its manufacturing process. It engaged nVentic to help it consider and quantify strategic alternatives in order to reach an objective decision and develop a multi-year roadmap.
Context
The component was a mature technology, but increasing market requirements indicated that the current material solutions, even though necessary in the short term, might prove inadequate over time. Our client was heavily reliant on a small number of suppliers, which represented an unacceptable concentration risk.
nVentic was engaged to:
- Identify and consider all strategic alternatives
- Develop a properly weighted decision-making process
- Find a solution that reduced the risk represented by the existing supply base, improved energy efficiency and minimized total cost of ownership
- Create a roadmap to move to the identified optimal solution as rapidly as necessary
Approach
nVentic started by baselining the starting situation:
- There was only one material solution in full operation
- The existing low-cost supply base represented a major risk, with both our client and its primary supplier very heavily reliant on each other
- The existing solution had known issues relative to corrosion, wear, performance, cost and size
- Evolving market requirements indicated that the limits of the existing technology were being reached
- Supply alternatives were much more costly and less flexible
- Two main material alternatives existed, but each with its own risks due to the fact they were untested and would in addition require process changes, some extensive
- In-house technical knowledge was limited to the existing material. The adoption of alternative materials would necessitate a significantly longer timeline
Pricing of the different technical alternatives was compared, including projected price developments over the coming 5 years. We baselined our client’s existing exposure to each supplier.
Once the different alternatives were fully identified and described, nVentic led a structured methodology to develop an optimal path. Some of the principle tools used included:
- Decision trees
- Failure Mode and Effects Analysis (FMEA), including financial impact and risk
- Scenario analysis
For the FMEA and scenario analyses, worst-case scenarios such as the complete and unannounced failure of the biggest supplier were quantified.
On the basis of all analyses, a business case was created to offset the mitigation costs against the weighted risk costs.
Results
Using a weighted scorecard, an alternative material was identified as the optimal solution over the longer term. Some of the principal reasons for this were superior performance, especially for new market demands, greater design flexibility, patent protection, compactness, and independence from unreliable suppliers. However, this was not a viable short-term solution.
Following the completion of all analyses, a multi-phased roadmap was developed. The strategy recommended and subsequently adopted had two main strands:
- Vertical supply chain integration of the main supplier
- Accelerated development of alternative material solutions
The roadmap set out a phased plan for the following three years. Year one focused on de-risking the existing situation as much as possible while continuing tests of alternative materials, years two and three concentrated on the ramp-up of alternative technical solutions.
The outcome of the project was the elimination of our client’s principal supply risk and the protection of a significant percentage of EBIT.
Would you like to talk to one of our experts? Contact us
Our client had done a detailed assessment for a major make versus buy decision, but then the market conditions changed considerably and it became unclear what the best thing to do would be. nVentic quantified the complex options to drive the company towards the optimum business scenario.
Context
A major manufacturer was suffering from a lack of sourcing options for a major component. The majority of world supply was coming from China and prices had risen considerably in line with underlying commodities, although the main element of price was the conversion cost. Following a thorough make versus buy exercise, our client decided to insource production, leaving them much less exposed to their suppliers. This was supported by a robust business case. Investment was made into machinery and expertise to bring production inhouse.
However, before in-house production even started, market prices of the underlying commodities dropped by a high double-digit percentage. Buying the component suddenly became very competitive. Because controlling were, correctly, including depreciation in the internal costs, it became more expensive to use components produced in-house to those bought on the market. This created a vicious circle where low utilisation of inhouse assets made it more expensive to use them, driving lower utilisation.
As a significant investment had been made, our client was reluctant to write it off. On the other hand, it made little sense to incur further cost unnecessarily simply because of a decision made in the past. Opinions on the best way forward differed. nVentic was asked to produce a quantitative comparison of the different options to help our client reach consensus on the way forward.
Approach
nVentic started by taking the original make versus buy exercise and baselining the actual and potential future operational realities. We then collected all of the data required to make as accurate a comparison of the options as possible.
A number of high-level scenarios were considered: Keeping the insourced capability as it was, moving the insourced capability to a lower-cost location within the group, and selling off the machinery and outsourcing production entirely.
Furthermore, the analysis was broken down to a granular level, to ascertain whether certain component sub-classes should be insourced whilst others were outsourced. And a number of new elements were also considered, such as currency fluctuations, new offers on the market, cost of poor quality (COPQ), and increased asset utilisation.
Qualitative aspects were also considered, such as R&D opportunities, quality enhancement opportunities and the likely development of the external supply market.
For each option considered, costs were compiled and validated with Finance. The major cost elements considered were: materials, taxes, labour, overheads, depreciation, freight and quality.
Results
The detailed analysis showed that for around 50% of the components in scope, in-house production was in fact less costly than external purchases. Furthermore, for almost all of the other 50% of components, in-house production was less costly than external purchases if depreciation was excluded. This effect was only magnified if utilisation could be significantly increased and the cost of poor quality reduced.
A key breakthrough was making the whole organisation realize that once the machinery was bought, the acquisition cost could not be avoided by not using it!
Moving the machinery to other locations was found to deliver even clearer financial benefits, but was less desirable from a R&D perspective. It was considered that the opportunity to drive innovation in this component had a significant value in itself, but would only become realistic if utilisation were increased.
Finally, since this component was a significant one to this client, maintaining in-house capability was worthwhile both from a strategic and risk perspective.
Would you like to talk to one of our experts? Contact us