Chapter 6, Intro to Supply Chain, Rutgers

Sourcing

The process of identifying a company that provides a needed good or service

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace

Drivers of Strategic Sourcing

1. Improve long-term financial performance

2. Increase customer focus

3. Improve product quality

4. Reduce the cost of materials

5. Reduce delivery lead times

6. Optimize the number of global suppliers.

7. Deliver more innovative products

Objectives of Strategic Sourcing

1. Improve the value-to-price relationship

2. Understand the category buying and management process

3. Examine supplier relationships across the entire organization.

4. Develop and implement multi-year contracts

5. Leverage the entire organization's spend

Insourcing

Producing goods or services using a company's own internal resources

Outsourcing

The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously

Single-Source Examples WILL BE ON EXAM

To establish a good relationship

Less quality variability

Lower cost [100% of volume]

Transportation economies

Proprietary product or process

Volume too small to split

Single Source WILL BE ON EXAM

A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier.

Multi-Source Example WILL BE ON EXAM

Need more capacity

Spread risk of supply disruption

Create competition

More sources of information

Dealing with special kinds of business

Functional Products

MRO items and other commonly low profit margins with relatively stable demands and high levels of competition

Multi-Source WILL BE ON EXAM

Purchasing a good or service from more than one supplier. Companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality and lower price.

Innovative Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition

Framework for Sourcing Strategy Development

-Classify the company's products and suppliers as belonging to either the functional or innovative category.

-Develop strategic sourcing goals and strategies for each category

-Create the sourcing team (typically a cross-functional team led by Procurement)

-Develop a team strategy and communication plan

Identify the targeted spend area(s) and conduct a spend analysis.

-Gather information on supplier capabilities. Use Request for Information (RFI)

-Develop a supplier portfolio (i.e., a profile of each supplier in each category)

-Develop a future state (i.e., vision of what the company wants the future to look like)

-Conduct supplier selection and negotiation

-Implement Supplier Relationship Management (SRM)

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance.

Steps for spend analysis

1. Defining the scope.

2. Identify all of the data sources.

3. Gathering and consolidating all of the data into one database.

4. Cleansing the data and standardizing it for easy review.

5. Categorizing the data.

6. Analyzing the data for:

7. Repeating the process on a regular schedule.

key areas of a typical spend analysis:

1. Total historic expenditures and volumes

2. Future demand projections or budgets

3. Expenditures categorized by commodity and sub-commodity

4. Expenditures by division, department, or user

5. Expenditures by supplier

Non-critical

routine items that involve a low percentage of the firms' total spend and involve very little supply risk.

Strategic

strategic items and services that involve a high level of expenditure and are vital to the firm's success.

Bottleneck

unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers.

Bottleneck items

High Supply Risk

Low Value to the Company

Maintain safety/strategic stock

Develop contingency plans

Strengthen relationships

Search for alternatives

Leverage

commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings.

Strategic Items

High Supply Risk

High Value to the Company

Ensure availability of supply

Focus on relationship building

Encourage process integration and innovation

Frequent communications

Establish mutually agreeable supplier performance criteria

Non-critical Items

Low Supply Risk

Low value to the company

Simplify and streamline the purchasing process

Reduce number of suppliers and simplify ordering

Transfer buying responsibility to "users' within the company

Leverage Items

Low Supply Risk

High Value to the Company

Consolidate volume as a negotiation tool

Use competitive marketplace to reduce costs

Automate supplier interfaces to minimize process related costs

Supply Base

The group of suppliers from which a company acquires goods and services.

Supplier of Choice

- Achieved a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier.

- Typically a trusted partners who know the buyers organization, processes, procedures, and requirements.

- Provides a higher value than their competitors and are characterized as reliable, responsive, flexible, and cost effective.

Supplier Selection Criteria

Cost

Quality

Capacity

Service

Location

Reliability

Communication capability

Order system and cycle time

Willingness to share information

Product and process technologies

Supply Base Rationalization

Reduction in the supply base to the lowest number of suppliers possible without significantly increasing risk

Strategic Alliance

an agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations.

Strategic Alliance Development

an extension of supplier development which refers to increasing a key or strategic supplier's capabilities.

Distributive Negotiations

Refers to a process that leads to self-interested, one-sided outcome

Collaborative Negotiations

Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties

Rewarding Supplier Performance

recognition of a supplier for exceptional performance, contributions, and/or capabilities

pain

Using a penalty or punishment a negative outcome for poor performance, cost overruns, quality problems, etc.:

gain

Using a reward as a positive outcome from exceptional performance:

Supplier Certification

verification that a supplier operates, maintains, improves, and documents effective procedures that relate to the buyer's requirements

reverse auctions WILL BE ON EXAM

A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business.

Vendor Managed Inventory

Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer

Co-Managed Inventory (CMI)

an arrangement where a specific quantity of an item is stored at the buyer's location

Supplier Co-location

Very similar to VMI and CMI, except that a representative of the supplier is actually embedded in the buyers purchasing group to forecast demand, monitor inventory, and place orders.

Corporate Social Responsibility

the practice of business ethics

Business Ethics

the application of ethical principles to business

Utilitarianism

An ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct.

Rights & duties

some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

Ethical sourcing WILL BE ON EXAM

is that which attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior

Sustainability

is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, social, and environmental challenges.

Grow Revenues

Growing the company through the launch of new sustainable products

reduce costs

Increasing resource efficiencies which will also help to reduce costs

Ethical Policies should include

-Create a Supplier Code of Conduct

-Inform suppliers of ethical sourcing expectations

-Create specific provisions within supplier agreements accordingly.

-Determine where all purchased goods originate

-Have knowledge of their suppliers' workplace principles

-Seek independent verification of supplier compliance with ethical standards

-Include ethics as part of their supplier performance rating system

-Routinely report supplier compliance to key stakeholders

Go "Green"

Ensuring that the products or materials used meet environmental objectives for things like waste reduction, reuse, and recycling

Manage Risks

Link company brands to the social consciousness of consumers

Build Intangible Assets

Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability