Strategic Sourcing Chapter 6

What Is Strategic Sourcing?

an approach to supply chain management that formalizes the way information is gathered and used so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace.

Strategic sourcing requires analysis of what an organization

organization buys, from whom, at what price and at what volume.

emphasis on the entire life-cycle of a product, not just its initial purchase price.

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, which often includes the business process of analyzing the total-spend by material category.

focus is on development of long-term relationships

Drivers of Strategic Sourcing

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Objectives of Strategic Sourcing

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Sourcing Strategies Definition

Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization.

High-level sourcing strategies include:

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: 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: 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.

How Many Suppliers to Use

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Developing Successful Sourcing Strategies

Successful sourcing strategies are almost always different for functional products versus innovative products.

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.

Innovative Products

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

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

Framework for Sourcing Strategy Development

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Spend Analysis

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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

Sourcing Categories:

Non-Critical

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

Sourcing Categories

Bottleneck

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

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.

Sourcing Categories

Strategic

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

Kraljic

Matrix

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Supply Base

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

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

Supply Base Rationalization (also known as, Supply Base Reduction, Supply Base Optimization).

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

Buyer-supplier partnerships are easier to manage with a rationalized supply base, and they can result in:

Reduced purchase prices

Fewer supplier management problems

Closer and more frequent interaction between buyer and supplier

Greater levels of quality and delivery reliability

Supplier Selection

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Preferred Suppliers

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Strategic Alliance

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

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Strategic Alliance Development

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

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Negotiating Win-Win Strategic Alliance Agreements

Distributive Negotiations

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

Negotiating Win-Win Strategic Alliance Agreements

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

Rewarding suppliers for outstanding performance motivates and encourages them to continue to strive for excellence in their products, services, and operations.

It also strengthens and fosters strong and productive supplier relationships.

Pain and Gain Share Agreements / Provisions

A supplier rewards and recognition program could also be reflected as part of the formal supply agreement in the form of pain and gain share provisions.

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Gain

Using a reward as a positive outcome from exceptional performance

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Supplier Certification Programs

Certification procedures verifying that a supplier operates, maintains, improves, and documents effective procedures that relate to the customer's requirements (e.g., cost, quality, delivery, flexibility, maintenance, safety, etc.)

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Additional Sourcing Concepts - Reverse Auctions

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.

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Additional Sourcing Concepts - Vendor Managed Inventory

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

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Additional Sourcing Concepts - Co-Managed Inventory

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

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Additional Sourcing Concepts - Supplier Co-location

The concept of Supplier Co-location is very similar to VMI and CMI, except that with Supplier Co-location a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders.

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Evolving Responsibilities of Supply Chain Professionals

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Business Ethics and Ethical Sourcing

Most companies today have some type of Corporate Social Responsibility program. Frequently these programs also require suppliers to agree to abide by a Supplier Code of Conduct in order to be considered an approved supplier.

Corporate Social Responsibility (CSR)

the practice of business ethics

Business Ethics

the application of ethical principles to business.

The two (2) main ethical approaches are:

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

Ethical Sourcing

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

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Ethical Policies Should Include:

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Sustainable Sourcing

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.

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Sustainable Sourcing Should Seek To:

Grow Revenues

Reduce Costs

Go "green"

Manage Risk

Build Intangible Assets

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