UNIT-4 PROCUREMENT & OUTSOURCING STRATEGIES_1
Page 1: Introduction to Outsourcing
In the 1990s, industrial manufacturers focused heavily on outsourcing, optimizing various functions including procurement and manufacturing.
Executives concentrated on stock value, leading to increased pressure to boost profits.
A straightforward strategy for profit enhancement was cost reduction through outsourcing.
The mid-90s saw a notable rise in purchasing volume as a component of total sales across firms.
Between 1998 and 2000, outsourcing in the electronics sector surged from 15% to 40%.
Page 2: Case Studies in Successful Outsourcing
Nike:
Dominates the athletic shoe market by outsourcing nearly all manufacturing.
Concentrates on R&D, marketing, sales, and distribution; achieved 20% annual growth in the 90s.
Cisco:
Transformed through a global virtual manufacturing strategy.
Quadrupled revenue from $1.3 billion to over $8 billion from 1994-1998 while saving $560 million annually.
Built a unified enterprise system linking customers, employees, manufacturers, and distributors, optimizing supply chain efficiency.
Page 3: Cisco's Manufacturing Strategy
Cisco created global manufacturing plants with close supplier partnerships.
The enterprise system enabled seamless data sharing, minimizing reliance on individual forecasts.
Implemented a dynamic replenishment system reducing supplier inventory:
Average turns reached 10, compared to 4 for competitors; for commodities, 25-35 turns a year.
Page 4: Apple's Outsourcing Approach
Apple outsources 70% of its components, including major products.
Focuses internal resources on its operating systems and software, achieving unique product differentiation.
Recent trends show U.S. and European firms outsourcing manufacturing and product design, mostly to Taiwanese companies.
Companies like Hewlett-Packard collaborate with Asian suppliers for product design input.
Page 5: Analyzing Outsourcing Decisions
Key Considerations:
Reasons for outsourcing manufacturing and innovation in technology industries; assessing risks involved.
Need for strategies based on product characteristics and clockspeed.
Will present a framework for optimizing buy/make decisions.
Effective procurement strategies will vary for different items within the same organization, tied closely to the firm's outsourcing strategy.
Page 6: Evolution of Procurement Processes
The procurement process can be costly for buyers; changes since 1995 with the advent of online marketplaces.
Variations in public, private, and consortium-based e-marketplaces present challenges and opportunities for procurement processes.
In the ’90s, companies used strategic outsourcing to rapidly cut manufacturing costs.
Case Study: Eight contract equipment manufacturers (CEMs) experienced quadrupled revenue and 11-fold capital expenditure growth from 1996 to 2000.
Page 7: Motivations for Outsourcing
Economies of Scale:
Reducing manufacturing costs through bulk ordering.
Risk Pooling:
Buyers transfer demand uncertainty to CEMs, which aggregate demand and reduce inventory levels while maintaining service levels.
Reduced Capital Investment:
Outsourcing allows transfer of demand uncertainty and financial burden to CEMs.
Page 8: Additional Benefits of Outsourcing
Focus on Core Competencies:
Companies can concentrate on their strengths, such as Nike’s focus on sales and innovation over manufacturing.
Increased Flexibility:
Enhances response to customer demand changes and accelerates product development cycles.
Provides access to new technologies and innovation across fast-evolving industries.
Page 9: Risks of Outsourcing
Case Study - IBM:
IBM entered the PC market by outsourcing key components, initially succeeding but later losing market share as competitors followed suit.
Developed a proprietary OS but could not regain market control, showing the risks of becoming overly reliant on suppliers.
Page 10: Further Risks - Cisco's Example
Case Study - Cisco:
In 2000, Cisco announced a $2.2 billion inventory write-off due to reduced demand, leading to layoffs.
Competitors managed forecasts better and reduced inventory levels, whereas Cisco’s long supply lead times hampered agility.
Page 11: Competitive Knowledge and Conflicting Objectives
Loss of Competitive Knowledge:
Outsourcing critical components may benefit competitors and hinder innovation.
Conflicting Objectives:
Buyers desire flexibility while suppliers prioritize stable, long-term commitments, creating potential tension.
Page 12: Design Issues and Flexibility Conflicts
Issues arise when buyers seek quick problem resolution while suppliers focus on cost reduction, slowing responsiveness to design changes.
Page 13: Framework for Buy/Make Decisions
Firms should assess which components to manufacture internally versus outsource.
Focus on core competencies but identify core activities effectively.
Two dependencies:
Dependency on Capacity: firms possess knowledge but outsource for various reasons.
Dependency on Knowledge: firms lack necessary skills and knowledge, necessitating outsourcing for access to capabilities.
Page 14: Toyota's Outsourcing Decisions
Toyota manufactures 30% of car components primarily focusing on engines internally and outsourcing others based on capacity and knowledge dependencies.
Page 15: Strategic Component Outsourcing
Toyota's outsourcing strategy varies based on the strategic importance of components, emphasizing a comprehensive understanding of product architecture.
Product Types:
Modular: Independent components, e.g., PCs.
Integral: Components with tightly related functionalities, requiring a holistic design approach.
Page 16: Product Modularity and Integrity
Very few real-world products fall strictly into modular or integral categories; most exhibit a combination based on complexity.
Cars exemplify both modular (stereo systems) and integral components (engine).
Page 17: Make/Buy Decision Framework
Table provided to analyze decision criteria based on modular vs. integral classifications and component dependencies.
Important aspects include capturing knowledge and having production capacity for modular products.
Page 18: Make/Buy Decision Summary
Decision criteria impact whether to outsource or maintain in-house production based on knowledge and capacity dependencies.
Page 19: Component-level Outsourcing Strategies
Evaluating outsourcing for specific components involves several criteria:
Customer importance.
Component clockspeed.
Competitive position.
Capable suppliers.
Product architecture.
Page 20: Decision-Making Based on Criteria
Various outcomes escalate based on customer importance and components' characteristics influencing in-house versus outsourcing strategies.
e.g., critical components should be retained in-house, while less important components may be outsourced.
Page 21: Evolution of Procurement Strategies
Shift in perception of procurement from clerical to a competitive strategic element, impacting overall profitability.
Page 22: Impact of Procurement on Profitability
General Motors example demonstrates procurement efficiency significantly influences profit margins compared to sales increases.
Page 23: Kraljic's Supply Management Framework
Strategic recommendations for supply strategies are sorted by dimensions: profit impact and supply risk.
Supply risk assessment includes multiple factors influencing availability and supplier dynamics.
Page 24: Kraljic's Supply Matrix Overview
Matrix quadrants identify item categories based on profit impact and supply risk, influencing sourcing strategies.
Strategic items require long-term supplier partnerships due to high risk and high impact.
Page 25: Additional Categories in Kraljic's Matrix
Leverage Items:
High profit impact but low supply risk; emphasize cost reduction with supplier competition.
Bottleneck Items:
High supply risk but low impact; prioritize continuous supply through long-term contracts.
Non-critical Items:
Simplify procurement processes, potentially through decentralized policies.
Page 26: Unique Procurement Strategies per Category
Each component type necessitates tailored procurement strategies reflecting their market demands and supply dynamics.
Page 27: Supplier Footprint Evolution
Shift from localized (U.S./Germany) to global suppliers (China) observed in automotive and high-tech sectors.
Page 28: Functional vs. Innovative Products
Fisher's framework positions functional products as simple items with predictable demand while innovative products are complex with unpredictable demand patterns.
Page 29: Strategies for Functional vs. Innovative Products
Different supply chain strategies apply; functional products focus on cost efficiency, while innovative products prioritize responsiveness and flexibility.
Page 30: Cost Management in Procurement
Functional Products:
Minimize total costs, focusing on landed costs.
Innovative Products:
Emphasize lead time reduction over landed costs due to unpredictability and higher margins.
Page 31: Sourcing for Components
Utilizing insights from Kraljic and Fisher can guide sourcing strategies across component categories to enhance procurement efficiency.
Page 32: Component Sourcing Strategy Framework
Four criteria guide sourcing decisions: forecast accuracy, supply risk, financial impact, and clockspeed.
Page 33: Importance of Component Forecast Accuracy
Forecast accuracy at the component level may differ from finished goods due to risk pooling benefits in multi-product usage; impacts sourcing strategy.
Page 34: Portfolio Approach in Sourcing
Utilize diverse strategies (long-term contracts, options, spot purchases) for balancing components' forecasting risks effectively.
Example - Hewlett-Packard:
Faced with uncertain demand for flash memory, leveraged a combination of purchasing strategies to manage risks.
Page 35: Component Sourcing Strategy Summary
A qualitative framework allows evaluation of sourcing strategies weighing financial stability, risk management, and component importance.
Page 36: Car Seats Case Study in Procurement Strategy
Analyses of specific items (e.g., car seats) suggests high forecast accuracy with low supply risk implies a focus on minimizing total landed costs.