supply chain 3

Module 3: Sourcing in the Supply Chain

Overview of Sourcing Concepts

  • Definition of Key Terms:
      - Purchasing: Activity of acquiring goods and services, mainly transactional.
      - Procurement: Broader process that includes supplier selection, price negotiation, contract management, and supplier performance management.
      - Strategic Sourcing: Aligning procurement priorities with organizational goals and managing a range of procurement activities.

Strategic Evolution of the Sourcing Process

  • Phases in Sourcing Process:
      1. Traditional Sourcing:
         - Characterized by tactical sourcing and functional purchasing.
         - Involves known supply base and multiple quotes for best pricing.
      2. E-Enabled Procurement:
         - Incorporates E-sourcing, e-procurement, and e-commerce.
         - Focuses on supplier relationships and expanding supply base.
      3. Strategic Sourcing:
         - Views sourcing as a strategic process with consideration for total cost or Total Cost of Ownership (TCO).
      4. Integrated Sourcing/Supply Chain:
         - Promotes seamless integration between sourcing and supply chain activities.

Types of Purchasing Activity

  • Three main categories of purchasing activity:
      1. Capital Goods
      2. Maintenance, Repair, Operations (MRO)
      3. Rebuy:
         - Standard: Regular procurement of regular items.
         - Modified: Changes to specifications or quantities in order to meet new requirements.

Quadrant Technique: Types and Importance of Purchases

  • Classifies items based on value and risk:
      - High Risk, High Value: Critical and unique items essential for final product.
      - High Risk, Low Value: Engineered items that require tailored strategies.
      - Low Risk, High Value: Basic production items and services.
      - Low Risk, Low Value: Office supplies and commodities.

Strategic Sourcing Core Principles

  1. Assess Total Value: Beyond acquisition cost; consider supplier relationship and TCO.

  2. Customized Sourcing Strategies: Tailored strategies for different spend categories.

  3. Thorough Requirements Assessment: Evaluate and rationalize needs prior to sourcing.

  4. Understand Supplier Economics: Recognize buying tactics based on supplier economics.

  5. Continuous Improvement: Sourcing as part of a procurement improvement cycle.

Strategic Sourcing Process Steps

  1. Develop Strategic Plan:
       - Establish cross-functional planning committee.
       - Identify key members and agree on sourcing scope.

  2. Understand Spend:
       - Conduct spend analysis to understand the sourcing needs and areas for improvement.

  3. Evaluate Supply Sources:
       - Initial supplier research, including market analysis.
       - Utilize Request for Information (RFI) and Request for Proposal (RFP).

  4. Finalize Sourcing Strategy.

  5. Implement Sourcing Strategy.

  6. Onboarding and Transitioning:
       - Finalize supplier agreements and establish new management processes.

  7. Collaborative Process Improvement:
       - Regular feedback, analyze savings, and aim for continuous improvement.

Total Landed Cost Concept

  • Definition: Total Landed Cost (TLC) represents the total cost incurred to take a product from its origin to the point of sale, encompassing various cost aspects:
      - Visible Costs: Purchase price, transportation, etc.
      - Additional Relevant Costs: Life-cycle costs, inventory costs, strategic sourcing costs, quality costs, technology costs, transaction costs.

  • Example of TLC Comparison:
      - Comparing sourcing from different countries:
         - China:
           - Net purchasing cost: €10,000
           - Transportation cost: €4,000
           - Customs: €1,000
           - VAT: €1,140
           - Total Landed Cost: €16,140
         - Vietnam:
           - Total Landed Cost: €16,678
         - EU Supplier:
           - Total Landed Cost: €14,203

Procurement: Consumption Management

  • Importance of analyzing consumption patterns across organization.
      - Expected Levels vs. Actual Levels:
        - High consumption may indicate a problem or inaccurate expectations.
        - Low consumption can indicate an opportunity for efficiencies.

Procurement: Contract Negotiation

  • Contracts define specific items, prices, and service levels.
      - Example Terms: Smaller, more frequent shipments vs. larger, less frequent shipments.
      - Simpler agreements generally for indirect goods; more complex for direct materials requiring trade-offs.

E-sourcing, E-procurement, and E-commerce

  1. E-sourcing Features:
       - Online negotiations and project management.
       - Supplier identification and contract management.

  2. Advantages and Concerns of E-procurement:
       - Advantages: Lower operating costs, improved efficiency, and procurement prices.
       - Concerns: Cyber-security, lack of personal interactions, and technology reliability.

  3. Types of E-commerce Models:
       - Sell-side system: Online businesses selling to individual companies.
       - Electronic marketplace: Multi-supplier catalogs.
       - Buy-side system: Buyer-controlled services.
       - Online trading community: Third-party maintained system for multiple buyers and sellers.

Conclusion

  • Effective sourcing strategies in procurement ensure alignment with organizational goals, improve supplier relationships, and streamline processes for increased efficiency in the supply chain.