Procurement Processes in Automotive Manufacturing

An overview of automotive specific procurement processes using SAP.

1. An overview of the SAP Automotive
Procurement processes implemented in a
major car manufacturer.
Note: Some of this work was carried out whilst the autho r was employed by one of the major ERP System
Implementers so names and customer detail have been removed to preserve confidentiality.
Kevin Harmon-Smith Feb 2013

2. AGENDA
AGENDA
Topic
Background to Automotive Procurement
SAP Standard Procurement Processes
Summary of Complete Procurement Process 
implemented and next steps

3. Background & Principles
Learning from previous
automotive experiences

4. Erptransformations Feb 20134
Background to Automotive Procurement
It took many decades for Chief engineers to realise that engineering-driven development approaches
were creating very high-cost products that required enormous technical overhead – although we did
get some great classic cars back then!
Then in the 90s Stallkamp developed a program called SCORE, for Supplier Cost Reduction Effort.
The program was announced in 1990 to a group of Chrysler's 150 largest suppliers. Suppliers were
asked to submit written proposals that would cut co sts. Suppliers had previously submitted such ideas,
but found engineering unwilling to take the time or the risk to evaluate them. The carrot was signific ant:
suppliers would receive half the pay-out from verif ied savings.
Chrysler made SCORE part of its formal supplier rat ing process, recording total number of ideas and
dollars of savings generated. Future business award s were based in part on performance ratings.
Suppliers could boost their rating if they kept les s than half the award. One major supplier, Magna,
gave 100% of its SCORE savings back to Chrysler and more than doubled its sales to the carmaker in
the early 1990s.
The real importance of the SCORE approach at Chrysler was not cutting costs on existing programs. It
was about creating a different approach to supplier s in new product development. Basically, SCORE
was a collaboration technique.
So what are the principles we can gather from the Chry sler experiences

5. Erptransformations Feb 20135
Forming the principles of Automotive 
Procurement
There were six major elements of the Extended Enterprise approach at Chrysler.
1. A centralized, fully integrated procurement organization.
2. A focus on long-term relationships with suppliers.
3. Development of procurement strategies through use of cross-functional teams.
4. A comprehensive (not price-focused) approach to costs that included management of
material economics as well as SCORE.
5. Supplier development, a concept not well developed by American companies (John
Deere was an exception) and ongoing supplier evaluation.
6. The leveraging of supplier resources and technology.
And of course when looking at procurement principles we h ave to consider “The
Honda Way.”

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The Honda Way
So how does Honda translate philosophical thinki ng into concrete action?
From a procurement standpoint, Honda accomplishes the balance between cooperating with
suppliers and insuring competitive pricing through the development and application of three
organizational capabilities:
• Modelling total cost,
• Building and sustaining supplier relationships and
• Leveraging supplier innovation.
THE THREE REALITIES - also often referred to by the Japanese phrase “San gen
Shugi,” are actual place, actual part, actual situa tion. This philosophy means “go to the
actual spot” where the action is taking place - such as the supplier’s plant - to address a
quality problem. Being in touch with all the realit ies of the situation contributes to a more
complete understanding and better decision making.
THE THREE JOYS philosophy is that each person
who comes in contact with the company — customer, employee or supplier -
should enjoy the experience.
All of which need to be measured…..

7. Erptransformations Feb 20137
The KPI’s used to Monitor Supplier Cooperation and 
Value
• Total cost savings
• Quality
• Delivery
• Cost avoidance
• Implemented cost reduction savings
• Procurement Cycle Time
• Percentage of suppliers accounting for 80% of the spend
• Procurement ROI
• Managed spend as percentage of total spend
• Contract compliance
The detail of how we do this is the subject of a later deck but what does the
Supplier get out of all this monitoring and control?

8. Erptransformations Feb 20138
Supplier Rewards
So the prize for Automotive Suppliers here is:
1. A share of the savings
2. Guaranteed large volume orders
3. Long term orders with long term visibility of
demand
4. No competing on price (but absolutely essential t o
maintain a consistent quality and meet demands.
So how do we shape the standard operational procurement processes to deliver
these rewards

9. SAP Standard Procurement
Processes
Building Block Library processes
The answer is that many SAP standard procurement process can deliver these rewards
and be easily referenced in the SAP Building Block Library. Only procurement processes
specific to automotive procurement are highlighted here all courtesy of SAP AG.
Tendering Award
Contract
negotiation
Finalise
Contract/ready
for execution
Finance –
Accounts
payable
Production
/call-
off/source
of supply

10. Erptransformations Feb 201310
ConvertPlanned
order
Requirements
Dependent
requirements
Projects
Reservations
Purchasing
functions
POs
Sched. agmt
delivery
schedules
Purchase
requisition
Warehouse/
stores
Production
order
Invoice
verification
Requirements
planning
Demand
management
A reminder of where the Requirements come 
from: Overall Process Flow
Manual

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Automotive Supply to Production Procedures
1. Push
2. Pull

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SAP Building Block Library
For many years SAP has provided a comprehensive Building Block Library of
Best Practices which are now included in their Rapid Depl oyment Solutions.
Standard Procurement processes are fully documented by SAP and will not be
reproduced here. Only those of specific interest to Autom otive Procurement will
be referenced in this section.

13. Erptransformations Feb 201313
Scenario Overview: 
Purchasing with JIT 
Delivery Schedules
• This scenario focuses on one option for the purcha sing of
materials: The purchasing process with delivery sch edules.
• This scenario starts with the creation of a vendor contract called
scheduling agreement.
• This agreement will be updated, released and trans mitted to the
supplier.
• After goods receipt the payment invoiced of the it ems and the
transfer to accounting is performed.
JIT Purchasing – a definition:
Purchasing that requires long term agreements with few suppliers Supplier selection is based not only on price but a lso delivery schedules, product quality
and mutual trust.
Purchase of materials such that delivery is immedia te based on demand for use.

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Process: 
Purchasing with JIT Delivery 
Schedules

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Scenario Overview: 
Quality Management for 
Procurement with Vendor Evaluation
Purpose
• This scenario emphasizes the quality inspection ac tivities
required in the automotive procurement process. On goods
receipt, an inspection lot is generated according t o the defined
material specification. A usage decision is then ma de as to
whether to accept or reject the material, based on the
inspection result. Subsequent processes such as quality
notification and vendor evaluation then follow.
Benefits
• Inspection lot creation at goods receipt
Key Process Steps
• Quality inspection
• Results recording / Usage decision
• Defects and returns
• Vendor evaluation

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Process:
Quality Management for Procurement 
with Vendor Evaluation

17. Summary of Complete
Process
Text

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Summary of Complete Procurement Processes
Quotation
Quotation
Purch.
Req.”
RFQ”
Quotation
PO”
GR*^
IR^
AP^
MRP
Projects
Prod. Ord.
Manual
Schedule
Agree.”
Del Sched
10 100 01/02
20 200 04/02
30 150 06/02
Contracts” Source List
Quota
Arrange.
P.I.R.
Vendor
Material
Manufacturer
Part
AMPL
Service
Entry
Service
Approval*^”
“ Can be approved
* Material Document
Posted
^ Accounting Document(s)
Posted
Blanket
Order

19. Erptransformations Feb 201319
Departure from SAP Standard
Apart from a few special material types and reports , no
horrendous modifications were made to the standard out of
the box software. This was the case for the entire Automotive
P2P process in the previous slide.
Master Data Management and Material Part Number (MPN)
Management did not come without their complications pri marily
because Master Data was spread across 11 source systems and
Suppliers’ master data had to be replicated in the comp any’s
systems.
Monitoring suppliers also did not come without a signifi cant overhead forcing the
move to consider a Supplier Evaluation dashboard option.

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Dashboards for Monitoring Suppliers

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Next Steps
Since this work was undertaken the Ariba SAP integr ation has been
completed and in an effort to reduce internal maint enance activities
mentioned above, an exercise was undertaken to evaluate the benefits
of moving to the Ariba Marketplace to utilise the Collaborative
Sourcing and Spend Visibility Solutions.
If there is a sound business case and award of appr opriate funding,
then this deck will be updated to reflect the use o f the Ariba
Marketplace for automotive procurement and the advantages that
brings – watch this space!
Collaborative Sourcing
• Network Community
• Technology
• Market Intelligence and
Capabilities

22. About

23. About
t
Contact
erptransformations
is an independent consultancy run by Kevin Harmon-Smith who is a
senior programme manager with a technical twist. With over 30 years’ continuous
employment in Industry and Consulting (including th e last 13 years with SAP) Kevin has
helped companies define and realise value from tech nology investments.
This experience includes leading the delivery of la rge-scale multi-million pound
programmes, shaping the enterprise architecture of several blue chip organisations, as
well as leading teams of up to 40 personnel.
Kevin has also successfully delivered tangible valu e adding Solution Architecture, Road-
mapping and Value Assessment projects across a wide range of Industry sectors.
Over the last three years, Kevin has been managing SAP UK’s Business Transformation
Services driving consulting revenue growth by devel oping services, building the teams
and by acting as a "trusted advisor" to FTSE 100 co mpanies.
erptransformations
has an extensive network amongst SAP consultants and partners
plus across a wide spectrum of the management consultancy sector. This network is
often utilised to deliver the optimum service for o ur customers.

24. About
t
Contact
Kevin Harmon-Smith MBA, MSc, PMP, MCMI
T
[phone]
E
[email protected]
www.erptransformations.co.uk