MG395 - Strategic Sourcing Quiz

Value Chain

full range of activities a company performs to bring a product or service from conception to delivery; every step should add value that exceeds the cost of performing the activity

Value Chain - Primary Activities Def

Directly involved in creating and delivering the product

What’s included in Primary Activities?

Inbound Logistics, operations, outbound logistics, marketing & sales, and service

Inbound Logistics (primary)

real time inbound inventory data
- location of distribution facilities
- vehicles
- material handling
- warehouse

Operations (primary)

Access to real time sales and inventory system
- standardized model

Outbound Logistics (primary)

Order processing; fully utilized transport

Sales & Marketing (primary)

Pricing, communication, promotion, market need, competitiveness

Service (primary)

Delivery, installation, maintenance, customer service

Value Chain - Support Activities Def

The infrastructure that makes primary activities possible

What’s included in Support Activities?

company infrastructure, HR management, technology development, procurement

Company Infrastructure (support)

Management, finance, legal planning

HR Management (support)

professional development, employee relations, performance appraisals, recruiting, competitive wages, staff training

Technology Development (support)

IT infrastructure, data security, integrated supply chain system, real time sales info

Procurement (support)

Real time inventory, communication with suppliers, stock and materials purchasing

Modularity

Designing products or processes as independent, standardized components that can easily be swapped or plugged together

• high modularity: makes it easy to outsource parts to different suppliers

• low modularity: requires, tight, highly integrated partnerships

Tradability

The ability of a good or service to be sold and transported across distances or borders w/o losing its value or freshness

• high: favors global sourcing

• low: restricts you to local suppliers

Economies of Scale

The cost advantages a business gains when production becomes efficient

• total volume incr, fixed costs spread out, per-unit cost lowers

Vertical Integration

When a co owns multiple stages of its value chain

Backward Integration

Buying your suppliers (a coffee shop buying a bean farm)

Forward Integration

Buying your distributors or retail channels

Complementary Goods

Products whose demand rises and falls together

• sourcing strategy of primary product dictates requirements for complement

Coordination Cost

The administrative, communication, and management friction of dealing w external suppliers

• time zones, quality checks, customs, shipping delays

Single Sourcing

using one supplier for a category to maximize volume leverage and partnership; carries high disruption risk

Multi-Sourcing

Spreading spending across several suppliers to foster competition, lower prices, and reduce supply chain risk

Global Sourcing (Offshoring)

Seeking out lower labor and material costs internationally

Nearshoring

Moving the supply base closer to the end market to improve responsiveness and cut transit times

ABC Fragmentation

Based on the 80/20 rule, spending falls into three buckets: A, B, and C items

A-Items

Top 10-20% of items accounting for ~80% of total spending

B-Items

Roughly 30% of items accounting for ~15% of spending

C-Items (the tail)

The remaining 50% of items making up only 5% of spending

Why ABC Fragmentation Matters

Sourcing professionals must avoid wasting coordination costs on C-items; automate and consolidate C-item purchases so management can focus all strategic negotiation/risk mitigation on A-items

Kraljic’s Portfolio Matrix

Categorizes procurement items based on:

1. supply risk (how hard it is to get)

2. Profit impact (how much it affects the bottom line)

Non-Critical

Supply Risk & Profit Impact: Low
Sourcing Strategy: Standardize & Automate

• ex: office supplies, standard screws

Leverage

Supply Risk: Low
Profit Impact: High
Sourcing Strategy: Exploit Purchasing Power

• ex: bulk raw materials, steel, cardboard

Bottleneck

Supply Risk: High
Profit Impact: Low
Sourcing Strategy: Ensure continuity

• ex: niche spare parts, specialized products

Strategic

Supply Risk & Profit Impact: High
Sourcing Strategy: Form Partnerships

• ex: custom microchips, proprietary engines