Supply Chain Chapter 6

Sourcing

identifying a company that provides a needed good or service

Strategic Sourcing

a comprehensive approach for locating and sourcing key suppliers to leverage its consolidated purchasing power to find the best possible values in the marketplace

How it works:

• identifying suppliers

• cultivating relationship

• continuously improving skills

• understanding and embracing the possibilities

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 (Note: for most companies, this means a reduction in suppliers)

7. deliver more innovative products in less time and less expensively than competitors

Objective of Strategic Sourcing

• improve the value-to-price relationship

• understand the category buying and management process to identify improvement opportunities

• examine supplier relationships across the entire organization. Share best practices across the organization

• develop and implement multi-year contracts with standardized terms and conditions across the organization

• 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

• the term has more recently become synonymous with the concept of buying an item from an external source of supply regardless of whether the item had been previously produced using a company’s internal resources

Reasons for Single Supplier

• to establish a good relationship

• less quality variability

• lower cost

• transportation economies

• proprietary product or process

• volume too small to split

Reasons for Multiple Supplier

• 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 margin items with relatively stable demands and high levels of competition (i.e., office supplies, food staples, etc.)

Potential Strategy: Reliable, low cost suppliers (Multi-sourced)

Innovation Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition (i.e., technology products such as the iPone)

Potential Strategy: Innovative, high-tech, cutting edge, market leading supplier. Long term partnership (Single-sourced)

Framework for Sourcing Strategy Development

1. identify the targeted spend area

2. create the sourcing team

3. develop a team strategy and communication plan

4. gather market information

5. develop a supplier portfolio

6. develop a future state

7. select suppliers and negotiate

8. implement Supplier Relationship Management (SRM)

Spend Analysis

categorizing and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance

Basic steps for conducting a spend analysis include:

1. Defining the scope (e.g., expenditures over a specific time period)

2. Identify all of the data source

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

4. Cleansing the data (finding and correcting errors) and standardizing it for easy review

5. Categorizing the data (e.g., commodity and sub-commodities)

6. Analyzing the data for:

• the best deals per supplier

• to ensure that all purchases are from preferred suppliers

• to reduce the number of suppliers per category

7. Repeating the process on a regular schedule

Key area of a typical spend analysis are:

• total historic expenditures and volumes

• future demand projections or budgets

• expenditures categorized by commodity and sub-commodity

• expenditures by division, department, or user

• expenditures by supplier

Supply Base

the group of suppliers from which a company acquires goods and services

Supply Base Rationalization (supply base reduction, supply base optimization)

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

• firms emphasize long-term strategic supplier alliance, consolidating volume into one or fewer suppliers, resulting in a smaller supply base

General Sourcing Categories: Non-Critical

routine items that involve a low percentage of the firms’ total spend and involve very little supply risk. e.g., standard screws in a computer factory

Low Level Supply Risk and Low Value to the Company

General Sourcing Categories: Bottleneck

unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. e.g., an integral part of technology hardware, the power pack for a laptop

High Level Supply Rist and Low Value to the Company

General Sourcing Categories: Leverage

commodity items where many alternatives of supply exist, and supply risk is low. Spend is high and there are potential procurement savings. e.g., plastic or raw material for Lego bricks

Low Level Supply Rist and High Value to the Company

General Sourcing Categories: Strategic

strategic items and services that involve a high level of expenditure and are vital to the firm’s success. e.g., the Qualcomm chipsets for mobile phones

High Level Supply Rist and High Value to the Company

Kraljic Model

Example of Sourcing Categories

• banking services

• books and publications

• catering and hospitality

• chemicals

• component parts

• computer hardware

• consultants

• energy/utilities

• entertainment

• food services

• furniture

• gases and fuels

• insurance

• janitorial

• legal services

• laundry and uniforms

• medical supplies

• memberships

• office supplies

• printing

• raw materials

• shipping services

• site/landscaping

• software

• telecommunications

• training

• transportation

• travel

• vehicles/equipment

• waste disposal

Supplier Selection

conducted by a cross-functional team

the process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards

commonly used criteria:

• cost

• quality

• capacity

• service

• location

• reliability

• communication capability

• order system and cycle time

• willingness to share information

• product and process technologies

Artificial Intelligence (AI)

improve supplier selection and increase the effectiveness of supplier relationship management

• supplier-related risks are a major consideration for supply chain professionals

• just one mistake on the part of a supplier, and a company’s reputation can be damaged significantly

• quickly and throughly analyze supplier-related data such as on-time in-full delivery performance, audits, evaluations, and credit scoring and provide information to use for future decisions regarding certain suppliers

• a company can make better supplier decisions and improve its customer service

Preferred Suppliers

best meet your company’s overall purchasing requirements

Supplier of Choice

• achieve a specific and exceptional level of performance over time as measured by a set of criteria agreed upon by both buyer and supplier

• typically trusted partners who know the buyers organization, processes procedures, and requirements

• provide a higher value than their competitors and are characterized as reliable, responsive, flexible, and cost effective

Preferred suppliers provide:

• product and process technology, and expertise

• product development and value analysis

• information on latest trends in materials, processes, or designs

• capacity for meeting unexpected demand

• cost efficiency due to economies of scale

Strategic Alliance

insourcing is an agreement between a buyer and a supplier to pursue some agreed-upon objectives while remaining independent organizations

• companies agree to share information and resources to achieve a mutual benefit

• preferred suppliers are potentially ideal candidates for a strategic alliance

benefits of these types of arrangements include:

• potential to increase revenue and profits for both parties

• potential to create a competitive advantage or block a competitor from gaining market share

• mitigate risks and ensure continuity of supply

• position the partners for future strategic opportunities

Distributive Negotiations

refers to process that leads to self-interested, one-sided outcome

Distributive Negotiations: Counterproductive

• also called antagonistic relationships

• parties work actively agains the needs of each other

• neither party take responsibility for what happens in the relationship

• destructive conflict occurs

Distributive Negotiations: Competitive

• also called adversarial relationship

• parties engage in competitive struggle over fixed value

• parties attempt to maximize value for their side

• minimal sharing of information

Collaborative Negotiations

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

• start with a clearly expressed understanding of how each company wants to benefit from the collaboration

• alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential

• negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties

Collaborative Negotiations: Cooperative

• parties work together and share information

• closer relationships are a result of mutual goals and trust

• supplier and buyer involvement increases

Collaborative Negotiations: Collaborative

• congruence of goals exists between parties

• parties work together to create new business opportunities and to share risk, rewards and resources

• parties work jointly to identify creative solutions to problems

Reverse Auctions

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

• the seller bid against one another to secure the buyer’s business, driving the price for the item downward

• bid prices are monitored until the session is officially over. The winning bidder is the seller who offers the lowest price

• private companies, public sector agencies, and non-profit organizations all use reverse auctions

Vendor Managed Inventory (VMI)

suppliers directly manage buyer inventories to reduce the buyer’s inventory carry costs and avoid stockouts for the buyer

VMI: Buyer-firm’s perspective

• supplier tracks inventories

• supplier determines delivery schedules and order quantities

• buyer can take ownership at the stocking location

• buyer may also be able to avoid taking ownership until the material is actually being used

VMI: Supplier’s perspective

• avoids ill-advised customer orders

• supplier decides inventory set up and shipments

• opportunity for supplier to educate customers about other products

Co-Managed Inventory

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

• once it is used, the item is replaced by the supplier, with the full knowledge and approval of the buyer

• the buyer provides systems access to the supplier, who manages the replenishment process in the buyer’s system

• the supplier reviews all available information and generates orders in the buyer’s system

• the primary difference from VMI is that in CMI, the supplier is just recommending an order, which is not confirmed until and unless the buyer approves it

Supplier Co-location

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

• the employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place orders

• the arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data

• benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization

Corporate Social Responsibility (CSR)

practice of business ethics

Business Ethics

application of ethical principles to business

two main ethical approaches:

• utilitarianism

• rights and duties

Business Ethics: Utilitarianism

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

Business Ethics: Right and Duties

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

Ethical Sourcing

consider the public consequences of organizational buying or to bring about positive social change through organizational buying behavior

• this involves the procurement organization ensuring that the sourced products are acquired responsibly and sustainably

• the people producing these products should be treated fairly and work in a safe environment

• the environmental and societal impacts must also be considered as part of the sourcing process

Sustainability

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

• do not mortgage the future for the present

• companies must consider worker safety, wages, working conditions, human rights, etc.

Sourcing Programs Should Try: Grow Revenues

growing the company through the launch of new sustainable

Sourcing Programs Should Try: Reduce Costs

increasing resource efficiencies, which will also help to reduce costs

Sourcing Programs Should Try: Go “Green”

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

Sourcing Programs Should Try: Manage Risks

link company brands to the social consciousness of consumers

Sourcing Programs Should Try: Build Intangible Assets

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