Chapter 6 Supply Chain

Supplier of choice

-Achieved a specific and exceptional "level of performance" over time as measured by a set of criteria agreed upon by both buyer and supplier. - Typically a "trusted partners" who know the buyers organization, processes, procedures, and requirements. - Provides a "higher value" than their competitors and are characterized as reliable, responsive, flexible, and cost effective.

Steps for conducting spend analysis

1. Define scope 2. Identify data sources 3. Gather data into one database 4. Cleansing the data and standardizing for easy review 5. Categorizing data 6. Analyzing data for best deals, ensure purchases are from preferred supplier, reduce number of suppliers per category 7. Repeat on regular schedule

- potential to "increase revenue and profits" for both parties -potential to create competitive advantage - mitigate risks and ensure a continuity of supply - partners for future strategic opportunities

Benefits of Strategic Alliances

Rationalized supply base

Buyer Supplier partnerships are easier to manage with a ____________________

Supplier code of conduct, specific provisions within supplier agreements about ethical sourcing, find how all goods originate, knowledge of workplace principles, independent verification of supplier compliance of ethical standards, ethics part of supplier performance rating system, report supplier compliance to stakeholders

Ethical policies should include

classify as innovative or functional, develop goals/strategies, create sourcing team, develop strategy and communication plan, spend analysis, supplier capabilities using RFI, supplier portfolio, future state of company, supplier selection and negotiation, supplier relationship management SRM

Framework for Sourcing Strategy Development

Multisourced: reliable, low-cost suppliers

Functional Products strategy

1. total historic expenditures and volumes 2. Future demand projections or budgets 3. expenditures categorized by commodity and subcommodity 4. exp. by divisions, dept, or user 5. exp. by supplier

Key areas of a typical spend analysis

Functional products

MRO items/commonly low profit margin items with relatively stable demands and high levels of competition

Sole Sourced

Only one supplier for an item Not a sourcing strategy because not a choice, and company cannot negotiate price or service

Sourcing

Process of identifying a company that provides a needed good/service

establish good relationship, less quality variability, lower cost, transportation economies, proprietary product/process, volume too small to split

Reasons for Single Supplier

cross-functional team

Supplier selection is conducted by

Vendor Managed Inventory (VMI)

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

Two main ethical approaches

Utilitarianism and Rights/Duties

Sustainability

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

Value-to-price relationship

achieve cost reductions while maintaining or improving quality/service

Successful Sourcing Strategies are almost always different for:

functional products vs. innovative products

Utilitarianism

greatest good for greatest number of people

high-level sourcing strategies include:

insourcing and outsourcing

Business Ethics

the application of ethical principles to business

Corporate Social Responsibility

the practice of business ethics

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 _________________.

Strategic Alliance Development

an extension of supplier development which refers to increasing a key or strategic supplier's "capabilities." Results in better market penetration, access to new tech/knowledge, and higher ROI Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances

Co-managed inventory (CMI)

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

Ethical sourcing

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

Ethical Sourcing

attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior Procurement organization ensure products are being sourced are acquired in a responsible and sustainable way People involved treated fairly and work in safe environment Environmental and societal impacts must be considered

Bottleneck

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

Pain

using a penalty or punishment as a negative outcome for poor performance, cost overruns, quality problems financial penalty, reducing future business, bill-back amaount (incremental costs resulting from poor performance)

Gain

using a reward as a positive outcomes for exceptional performance financial bonus, more business/longer contracts, share a portion of cost reductions, provide access to seminars/conferences/tools/resources, publicly recognize supplier as preferred supplier/partner/etc.

Supplier Certification

verification that supplier operates, maintains, improves, and documents effective procedures that relate to buyer's requirements _________ used to differentiate strategic supplier alliance candidates from others

Objectives of Strategic Sourcing

1. Improve the value-to-price relationship 2. Understand the category buying and management process 3. Examine supplier relationships across the entire organization. 4. Develop and implement multi-year contracts 5. Leverage the entire organization's spend

Noncritical, bottleneck, leverage, strategic

4 Sourcing Strategies

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers, so that organization can leverage its consolidated purchasing power to find best possible values in marketplace Requires analysis of what an org buys, from whom, price, and volume Emphasis placed on entire life-cycle of product, not just initial purchase price

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. used by private companies, public sector agencies, and non-profit organizations

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 Establishing a relationship that works well for both parties

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance.

Single Sourced: innovative, high-tech, cutting edge supplier for long term partnership

Innovative Products strategy

Multi-source

Purchasing a good or service from more than one supplier. Companies may use __________ to create competition between suppliers in order to achieve higher quality and lower price.

Outsourcing

Purchasing an item/service externally, which had been produced using a company's own internal resources previously Buying an item from an external source of supply regardless of whether item had been previously produced using a company's internal resources

need more capacity, spread risk of supply disruption, create competition, more sources of info, dealing with special kinds of business

Reasons for multiple suppliers

Supply Base Rationalization (Supply Base Reduction, Supply Base Optimization)

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

-Grow revenues -Reduce costs -go "green" -Manage risk -Build intangible assets (such as social and environmental responsibility)

Sustainable sourcing programs should try to

Rights and Duties

some actions are right in and of themselves regardless if the consequences

Noncritical

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

Distributive Negotiations

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

Strategic

____ items and services that involve high level of expenditure and are vital to firms success

Supplier Co-location

a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders.

Strategic Alliance

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 mutual benefit Preferred suppliers are potentially ideal candidates for a _______ ______

Innovative Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition

Leverage

commodity items with many alternatives, and low supply risk. Spend is high and there are potential procurement savings

Criteria for selecting supplier

cost, quality, capacity, service, location, reliability, communication capability, order system and cycle time, willingness to share info, product and process tech

Drivers of Strategic Sourcing

long-term financial performance, customer focus, product quality, cost of materials, delivery lead times, optimize global suppliers (reduction in number of suppliers), innovative products in less time and lower price

Rewarding suppliers for outstanding performance

motivates and encourages them to continue to strive for excellence fosters strong and productive supplier relationships

Single-Source

multiple potential suppliers available for product/service, but company decides to purchase from only one supplier

Insourcing

producing goods or services using a company's own internal resources

Reward incentives (examples)

promise of future business, public recognition, cash back, strategic or preferred supplier status