SCO 3045

Reasons to Insource

Anything that threatens the assurance of supply (AKA the necessity argument AKA we don't want to but we have to) Pretty much same as reasons to make (AKA opportunity argument AKA we want to do this)

what is spend analysis?

Ascertain true category spend Identify strategic sourcing opportunities through demand aggregation and supplier rationalization Identify expense reduction What was the corporate wide spend associated with each cost last yer? What are the top commodities? Which suppliers are the most valuable and strategic? How much am I spending with preferred suppliers?

ABC or Pareto Analysis

Assigns items to either A, B, or C category (high to low dollar items respectively) More time and management attention is directed toward A items because of the annual spend consumed by the purchase of those items

Reasons for making

Competitive, political, or social reasons Competitor acquires ownership of key source of raw material Countries insisting on certain portion being made within the country Lower unemployment in a certain area Quantities are too small for any supplier Quality requirements or too exact Greater assurance of supply or coordination of supply with demand Preserve technological secrets New processes You can do it cheaper Reduce risk Distance from closest supplier is too great

commercial equivalents

Create the opportunity for lower cost or better, more innovative solutions Can suggest potential improvements on the commercial equivalent presented by a designer or specifier E, saying "I need an aspirin" instead of first saying "I need something to cure my headache" Essential to break apart: determine what need is and why, then translate these needs into commercial equivalents so that suppliers can understand what is needed

Cost categories

Direct Costs Indirect costs

How to use spend analysis

ETLA approach ABC or Pareto Analysis Portfolio or quadrant analysis

Portfolio or quadrant analysis

Enables supply mgmt. team to place each major spend category on a spend map based on the risks to acquire in the marketplace and the value of the cateory to the org. Risk = y-axis Value = x-axis High risk, low value = bottleneck High risk, high value = strategic Low risk , low value = noncritical/routine Low risk, high value = leverage/commodity

Areas of necessary agreement between buyer and supplier re: quality

Essential requirements of transaction The way those requirements are to be realized How to verify that requirement are being fulfilled The actions to be taken when requirements/expectations are met

ETLA approach

Extract the information from various TI systems or other sources Transform - normalize and enrich the data Load - load the data into a data base Analyze - create a library of reports to mine the data

"Fair Price"

Lowest price that ensures a continuous supply of the proper quality where and when needed Prevailing price doesn't have to be fair price Should take in to consideration the cost the supplier incurs as well as a "reasonable" profit because you want them to stay in business

Different types of specifications

Physical or chemical Material or method performance

Various cost areas of quality

Prevention costs Appraisal costs (inspection, testing, measuring) Internal failure costs External failure costs Morale costs (may remove pride in one's work)

what's typically negotiable

Price Quantity Production location Future savings/future increases Contract language

Various elements of contracts (not contract types)

Price protection caluses Service Termination Provision for change Escalator clauses o Increase or decrese in price if costs change Most favored customer o Supplier can't give a different customer a lower price during contract length

Hedging

Purchase and sale in two different markets which are assumed to operate so that a loss in one will be offset by an equal gain in the other Normally done by buying and selling same commodity in the spot (cash) and future markets

Reasons for Buying

Requirements of certain amount sourced from small bus. Water scarcity Certain brand will make product better (apple) Lack of managerial or technical expertise Cheaper Lack of production capacity Reduce risk Desire to stay lean Highly capable supplier nearby

categories of needs

Resale Raw or semiprocessed materials Parts, components, packaging MRO Capital Assets Services Other

Process of Competitive bidding

Screen sources of supply and select potential candidates Send RFQ offline or automated Close bidding, ask clarifying questions Analyze bids, review with mgmt. Award business and inform

Reasons to Outsource

Similar to reasons to buy Distinction between outsourcing and insourcing: have to think about what to do with displaced workers and equipment that will be unused

disadvantages of specs

Some requirements are impossible to write specs for Specs add to immediate cost Spec might not be better than product already available Cost of testing Harsh secs discourage potential suppliers Risk for buying org. of item actually not working for intended purpose (unless performance spec) Minimum buyer specs are likely to be max specs for supplier

forward buying

The commitment of purchases in anticipation of future requirements beyond current lead times Commodities are often times forward bought

Need Criteria

The criteria for deciding what in particular represents good value in terms of sourcing from external suppliers

negotiation

The most sophisticated means of price determination Buyer and supplier must, through discussion arrive at a common understanding on the essentials of a purchase/sale contract Can take time and considerable expense to accomplish

Definition of quality

The notions of function, suitability reliability, and conformance with specifications, satisfaction with actual performance, and best buy Ability to provide goods and service in conformance with specs Whether the item performs in actual use to the expectations of the original requisitioner

advantages of specifications

Thought and careful study have been given Standard is established. Checking materials reducing waste Opportunity to purchase an identical requirement from another supplier Potential for equitable competition Seller will be responsible f. performance when buyer specs. Performance

service quality and what makes it unique

Unique because you can't measure quality Some services are highly intangible and impossible to inventory/measure

What is Environmental change strategies designed to accomplish?

Anticipates and recognizes shifts in total environment

Advantages of Centralized

Strategic focus Ability to pay for talent Consolidation Coordination of processes Common suppliers Critical mass Cost of purchasing low

Direct contribution of supply management

Supply savings Profit leverage effect ROA

Cost Management tools/techniques

TCO target costing Learning curve negotiation

cost categories

cost approach market approach

Key elements of a strategic plan

Assurance of supply strategies Supply chain support strategies Cost Reduction strategies Environmental change strategies Competitive edge strategies Risk management strategies

Supply Teams

Critical to success Can be project oriented or ongoing Cross-functional teams o NPD o Sourcing o Supplier councils o Customer participation

What are Assurance of supply strategies designed to accomplish?

Future supply needs should be met with emphasis on quality and quantity, and must consider changes in both demand and supply

What are Supply chain support strategies designed to accomplish?

Maximize the knowledge supply members have and making it available to buyers

What are risk management strategies designed to accomplish?

Need to be ready to respond and have adequate controls in place to ensure continuity

Why is spend analysis important?

important to understand where your money is going and what its contributing to. Therefore you can understand how to save money and make smarter supply decisions

supply chain activities

o AP o Cost mgmt. o Legal o Materials management and logistics o Production planning o Quality o Supply budget and financial mgmt

traditional

o Common sense and quantifiable o Quality o Quantity o Delivery o Price o Service

target costing

o Establish price at which it plans to sell its finished product, subtracts its normal operating profit, leaving target cost that the organization seeks

additional current

o Financial o Risk o Environmental o Innovation o Regulatory Compliance

strategic

o Financial impact o Risk reduction o Access to new tech markets o Assurance of supply o Revenue enhancement o Corporate image improvement

Objectives of Sourcing/Supply Management

o Improve competitive position o Uninterrupted flow o Inventory low o Improve quality o Best suppliers o Standardize items and processes o Lowest total TCO

Involvement in corp. activities

o Mergers and acquisitions o new facilities o NPD o Outsourcing o Revenue enhancement o Cost reduction initiatives o E-commerce

Type of involvement

o No involvement o Documentary (recorder, send PO's, receives bids) o Professional (exercise expertise in important acquisitions) o Meaningful involvement (extent to which supply is expected to participate in major corporate activities)

learning curve

o One becomes more proficient with experience o Actually brought on by many factors Learning rate of labor Motivation of labor and mgmt. to increase output Improved methods, procedures Better/more effective tools and equipment Flexibility of job and people Ratio of labor vs machine time Amount of preplanning done Turnover of labor in the unit Pressure of competition to do it better and faster

cost approach

o Price is certain amount over direct cost o Provides for buyer to seek lower cost opportunities o Negotiation = useful tool

market approach

o Prices are set in the market and may not be directly related to cost o Purchaser either lives with the market price or finds ways around them o Negotiate on things other than price o Substitution of similar items = powerful o Long-term contracts can be useful

What is acquired

o Raw materials o Standard purchases o MRO o Services

tco

o looking at preproduction through post production costs

What are Cost Reduction strategies designed to accomplish?

reduce total cost of acquisition

Three levels of needs

strategic traditional additional current

Areas of Responsibility for Sourcing/Supply Management

What is acquired Supply chain activities Type of involvement Involvement in corp. activities

Types of technology systems used in Sourcing/Supply Management

ERP Cloud computing E-procurement EDI E-catalogs Marketplaces Online Reverse

Benefits of Information Systems Technology

-Data more transparent, more accurate -Relieve supply decision makers of lower-value adding tasks -Speedier communication -Monetary control -Systems integration

Operational vs. Strategic mindset in supply management

-Operational = trouble avoidance, strategic = opportunistic -Operational = daily activities that can be streamlined and automated -Strategic = futuristic and searches for competitive advantage

Garvin's 8 quality dimensions

1. Performance (primary function) 2. Features (bells and whistles) 3. Reliability (probability of failure) 4. Durability (life expectancy) 5. Conformance (meeting of specs) 6. Serviceability (maintainability and ease of fixing) 7. Aesthetics 8. Perceived qualities (in the eyes of the consumer 9. 9th should be procureability

Indirect contribution of supply management

1. Information source (connection to the market) 2. Effect on efficiency (can delay production) 3. Effect on competitive position (right products, right place, right time) 4. Effect on risk (hedging) 5. Effect on image ("you are the company you keep" ie vendors) 6. Training ground 7. Management strategy

The supply management process/Steps in the process

1. Recognize need 2. Describe need 3. Identify potential sources 4. Select a source 5. Prepare and place PO 6. Follow up and expedite 7. Receipt and inspect 8. Invoice clearing and payment 9. Monitor/maintain

Various structure choices for Sourcing organization

Centralized o Authority and responsibility for strategy assigned to central org Hybrid o Responsibility is shared between central supply org and bus. units Decentralized o Responsibility is dispersed throughout the org

The relationship between the corporate, business unit and functional strategy

Corporate = what businesses are we in? How to allocate resources? Business Unit = Mold a particular bus. unit Function = functional contributions to the bus. strategy and the internal allocation of resources Linking supply strategy to corporate strategy is essential

Disadvantaged of Decentralized

Difficult to communicate Too much focus on local Lack of standardization

Advantages of Decentralized

Easier coordination Speed of response BU autonomy Hide the cost of supply

What are competitive edge strategies designed to accomplish?

Exploit market opportunities and organizing strengths to give best adv.

Disadvantages of Centralized

Lack of BU focus Narrow Too focused on corporate Distance from users

Various types of risk and how sourcing can help mitigate them

Operational o Such as weather or strikes that hinder supply and cease supply of goods o Mitigate: careful supplier evaluation to ensure other forms of disruptions and shortages don't occur Financial o Risk associated with changes in the price of goods, labor rates, tax policy, etc. Long-term contracts can either be good or bad Reputational o "you are known by the company you keep"