Supply Chain Chapter 6

Drivers of Strategic Sourcing

1. improve long-term financial performance 2. increase customer focus 3. improve product quality 4. reduce the cost of materials 5. reduce delivery lead times 6. optimize the number of global supplies (most companies means a reduction in the number of suppliers) 7. deliver more innovative products, in less time, and less expensively than competitors

Objectives of strategic sourcing

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

Negotiations are not about each company obtaining the most value, they are more about....

establishing a relationship that works well for both parties.

Bottleneck

high-level supply risk, low value to company 1. maintain safety/strategic stock 2. develop contingency plans 3. strengthen relationships 4. search for alternatives

Key areas of a typical spend analysis are:

1. total historic expenditures and volumes 2. future demand projections or budgets 3. expenditures categorized by commodity and sub-commodity. 4. expenditures by division, department, or user. 5. expenditures by supplier

preferred suppliers provide:

-product and process technology, and expertise. -product development and value analysis -info on latest trends in materials, processes, or designs -capacity for meeting unexpected demand -cost efficiency due to economies of scale

Build intangible assets

Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability.

Supplier selection criteria:

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

The benefits of strategic alliance:

-potential to increase revenues and profits for both parties. -potential to create a competitive advantage or block a competitor from gaining market share. -mitigate risks and ensure a continuity of supply. -position the partners for further strategic opportunities.

Outsourcing

The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously. -the term has more recently become synonymous with the concept of buying an item from an external source of supply regardless of whether the item had been previously produced using a company's internal resources.

Co-Managed Inventory (CMI)

An arrangement where a specific quantity of an item is stored at the buyer's location. -once it is used, the item is replaced by the supplier, with the full knowledge and approval of the buyer. -the buyer provides systems access to the supplier, and the supplier takes responsibility for managing the replenishment process in the buyer's system. -the supplier reviews all of the available info and generated orders in the buyer's system.

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 technologies and knowledge, and a higher return on investment. -eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances.

Sourcing Strategies

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

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. -successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the collaboration.

Business ethics and ethical sourcing

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

Rewarding Supplier Performance

Recognition of a supplier for exceptional performance, contributions, and/or capabilities. -rewarding suppliers for outstanding performance motivatesR and rewards them to continue to strive for excellence in their products, services, and operations. -it also strengthens and fosters strong and productive supplier relationships.

Supply Base Rationalization

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

Non-critical

Routine items that involve a low percentage of the firm's total spend and involve very little supply risk.

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. -this involves the Procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way. -the people involved in producing these products should be treated fairly and work in a safe environment. -the environmental and societal impacts must also be considered as part of the sourcing process.

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, -do not mortgage the future for the present -companies must considering woke safety, wages, working conditions, human rights, etc. -the company involved must understand the value of incorporating sustainable standards into their sourcing goals.

Leverage

low level supply risk, high value to company 1. consolidate volume as a negotiation tool 2. use competitive marketplace to reduce costs 3. automate supplier interfaces to minimize process related costs

Non-critical

low level supply risk, low value to company 1. simplify and streamline the purchasing process 2. reduce number of suppliers and simplify ordering. 3. transfer buying responsibility to "users" within the company

High-level sourcing strategies include:

-insourcing -outsourcing -single-soruce -multi-source

Sourcing categories

-non-critical -bottleneck -leverage -strategic

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

-reduced purchase prices -fewer supplier management problems -closer and more frequent interactions between buyer and supplier -greater levels of quality and delivery reliability

Strategic Sourcing

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

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.

Leverage

Commodity items where many alternatives of supply exist and supply risk is low. -spend is high and there are potential procurement savings.

Go "green"

Ensuring that the products or materials used meet environmental objectives for things like taste reduction, rescue, or recycling.

Grow revenues

Growing the company through the launch of new sustainable products.

Reduce Costs

Increasing resource efficiencies which will also help to reduce costs.

Sole sourced

Not truly a strategy as there really isn't a choice, and there is very little opportunity for a company to negotiate price or service.

Insourcing

Producing goods or services using a company;s own internal resources.

Vendor Managed Inventory (VMI)

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

Business ethics

The application of ethical principles to business . -two main approaches: utilitarianism & Rights and Duties

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.

Corporate Social Responsibility (CSR)

The practice of business ethics.

Sourcing

The process of identifying a company that provides a needed good or service.

The primary difference from VMI is that in CMI....

The supplier is just recommending an order which is not confirmed until and unless the buyer approves it.

Supplier Selection

Typically conducted by a cross functional team. -the process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards.

Bottleneck

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

Gain

Using a reward as a positive outcome from exceptional performance: -buyer could award a financial bonus to the supplier for exceptional performance -buyer could award more business and/or longer contracts to the supplier -buyer could share a portion of any cost reductions developed by the supplier which benefits the buyer. -buyer could provide access to in-house training seminars, conferences, tools and info, or other resources to the supplier. -buyer could publicly recognize the supplier

Successful sourcing strategies are almost always different for...

functional products versus innovative products.

Strategic

high-level supply risk, high value to company 1. ensure availability supply 2. focus on relationship building 3. encourage process integration and innovation 4. frequent communication 5. establish mutually agreeable supplier performance criteria.

Reasons for multiple suppliers

-need more capacity -spread risk or supply disruption -create competition -more sources of information -dealing with special kinds of business

Reward incentives can include:

-the promise of future business -public recognition -cash back for achieving performance-based objectives -strategic or preferred supplier status

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. -agreements could be negotiated to spell out in detail the gains and pains that the supplier will realize for either exceptional or poor performance. -both parties would mutually agree on the provisions and the positive and negative outcomes.

Manage risks

Link company brands to the social consciousness of consumers.

Functional Products

MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition. -potential strategy: reliable, low cost suppliers. -multi sourced

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.

Distributive Negotiations

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

Strategic

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

Reasons for a single supplier

-to establish a good relationship -less quality variability -lower cost (100% of volume) -transportation economies -proprietary product or process -volume too small to split

Framework for sourcing strategy development

1. Classify the company's products and suppliers as belonging to either the functional or innovative category. 2. develop strategic sourcing goals and strategies for each category. 3. create the sourcing team 4. develop a team strategy and communication plan 5. identify the targeted spend areas and conduct a spend analysis 6. gather info on supplier capabilities. use RFI 7. develop a supplier portfolio 8. develop a future state 9. conduct supplier selection and negotiation 10. implement Supplier Relationship Management (SRM).

Pain

Using a penalty or punishment is a negative outcome for poor performance, cost overruns, quality problems, etc. -buyer could impose a financial penalty -buyer could reduce future business with the supplier for poor performance -buyer could implement a bill-back amount equal to, or a percent of, the incremental costs resulting from poor performance.

Supplier Certification

Verification that a supplier operates, maintains, improves, and documents effective procedures that relate t the buyer's requirements. -programs are used to differentiate strategic supplier alliance candidates from others -companies may choose to develop internal programs or require external certifications such as ISO 9000 or ISO 14000

Preferred suppliers

a 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 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.

Objectives of strategic sourcing involve....

the reduction of cost while maintaining or improving quality.

Basic steps for conducting a spend analysis:

1. defining the scope 2. identify all of the data sources 3. gathering and consolidating all of the data into one database. 4. cleansing the data and standardizing it 5. categorizing the data 6. analyzing the data 7. repeating the process on regular schedule

Strategic Alliance

An agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations. -companies agree to share info and resources to achieve a mutual benefit. -preferred suppliers are potentially ideal candidates for a strategic alliance.

Single-Source

A sourcing strategy where there are multiple potential suppliers available for a product6 or service, however, the company decides to purchase from only one supplier. -this is in contrast to a situation where there is only one supplier for an item, i.e., sole sourced.

Reverse Auctions

A sourcing technique where pre-qualifies suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business. -the sellers bid against one another to secure the buyer's business, driving the price to be paid for the item downward. -bid prices are monitored until the session is officially over. -used by private companies, public sector agencies, and non-profit organizations

Innovative products

Characterized by short product life cycles, volatile demand, high profit margins, and relatively less competitions. -potential strategy: innovative, high-tech, cutting edge, market leading supplier. -long term partnership -single sourced

Spend Analysis

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

A regular review of an organization's sourcing strategy is....

a must in order to achieve significant agreed upon results.

Supplier Co-Location

Very similar to VMI and CMI, except that a representative of the supplier is actually embedded in the buyer's organization to forecast demand, monitor inventory, and place orders. -the employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place order.s -the arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data. -benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization.