Strategic Sourcing (Ch 6)

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.

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

Strategies for Leverage Items

Consolidate volume as a negotiation tool Use competitive marketplace to reduce costs Automate supplier interfaces to minimize process related costs

What kind of team typically conducts supplier selection

Cross functional team

Current trend for number of suppliers

Fewer sources

Potential Strategy for Innovative Products

Innovative, high-tech, cutting edge mkt leading supplier. Long term partnership. Single sourced.

Strategies for Bottleneck Items

Maintain safety/strategic stock Develop contingency plans Strengthen relationships Search for alternatives

Strategic Sourcing

Managing the firm's external resources in ways that support the long-term goals of the firm

Supply Base Rationalization

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

Distributive Negotiations

Refers to a process that leads to self-interested, one-sided outcome. Typically happens when one side has an advantage and is focused on the short-term.

Potential Strategy for Functional Products

Reliable low-cost suppliers. Multi-sourced

Strategies for Non Critical Items

Simplify and streamline the purchasing process Reduce number of suppliers and simplify ordering Transfer buying responsibility to "users' within the company

Rights and Duties

Some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

Effects of Rewarding Supplier Performance

Strengthens and fosters strong and productive supplier relationships.

Vendor Managed Inventory (VMI)

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

Business Ethics

The application of ethical principles to business.

Outsourcing

The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously. Synonymous with the word buying.

What are Supplier Certification programs used for?

To differentiate strategic supplier alliance candidates from others.

Preferred Supplier

Top-tier supplier that you'd rather work with.

Supplier Certification

Verification that a supplier operates, maintains, improves, and documents effective procedures that relate to buyer requirements

Examples of Gain

- Financial Bonus - More business - Public recognition - Access to in-house training and conferences

Examples of Pain

- Financial Penalty - Reduce future business - Bill-back Amount equal to costs from poor performance - Studying supply chain

What should Sustainable Sourcing Programs try to do

- Grow revenues - Reduce costs - Go "Green" - Manage Risks - Build intangible assets

Reasons for multi sourcing

- Need more capacity - Spread risk of supply disruption - Create competition - More sources of information - Dealing with special kinds of business

Benefits of a supplier strategic alliance

- 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 future strategic opportunities

Single-Source

A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier.

Reverse Auction

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.

Evolution of Supply Chain Management Responsibilities

- 50's to 70's: Procurement, Manufacturing, and Logistics - 70's to 80's: Process and Resources - 80's to 90's: Risk and Security - 2000 to now: Ethics and Sustainability

Qualities of Preferred Suppliers

- Achieve high level of performance - Trusted partners - Provide a higher value

Advantages of Vendor Managed Inventory (VMI) for a supplier

- Avoids ill-advised customer orders - Supplier decides inventory set up and shipments - Opportunity for supplier to educate customers about other products

Sourcing Strategies by Category

- High Value High Risk: Strategic Items - High Value Low Risk: Leverage Items - Low-Value High Risk: Bottleneck Items - Low-Value Low Risk: Non-Critical Items

Advantages of Vendor Managed Inventory (VMI) for a buyer

- Supplier tracks inventories - Supplier determines delivery schedules and order quantities - Buyer can take ownership at the stocking location - Buyer may also be able to avoid taking ownership until the material is actually being used.

Reasons for single source

- To establish a good relationship - Less quality variability - Lower cost [100% of volume] - Transportation economies - Proprietary product or process - Volume too small to split

Spend Analysis

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

Who uses Reverse Auctions?

Private companies, public sector agencies, and non-profit organizations.

Sourcing

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

Insourcing

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

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.

What do successful sourcing strategies do?

Remember to have different strategies for functional and innovative products.

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

Sustainability

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.

Supplier Co-location

The concept of Supplier Co-location is very similar to VMI and CMI, except that a representative of the supplier is actually embedded in the buyer's purchasing group to forecast demand, monitor inventory, and place orders.

Supply Base

The group of suppliers from which a company acquires goods and services.

Corporate Social Responsibility

The practice of business ethics

Non-Critical

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

Bottleneck

unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers. Worth spending a lot of time on.

Co-Managed Inventory (CMI)

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

Leverage

commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are POTENTIAL PROCUREMENT SAVINGS.

Framework for Sourcing Strategy Development (this one sucks)

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 (typically a cross-functional team led by Procurement) 4. Develop a team strategy and communication plan 5. Identify the targeted spend area(s) and conduct a spend analysis. 6. Gather information on supplier capabilities. Use Request for Information (RFI) 7. Develop a supplier portfolio (i.e., a profile of each supplier in each category) 8. Develop a future state (i.e., vision of what the company wants the future to look like) 9. Conduct supplier selection and negotiation 10. Implement Supplier Relationship Management (SRM)

Steps in 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 (finding and correcting errors) and standardizing it for easy review. 5. Categorizing the data. 6. Analyzing the data for: - the best deals per supplier - to ensure that all purchases are from preferred suppliers - to reduce the number of suppliers per category. 7. Repeating the process on a regular schedule.

Drivers (effects) 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 suppliers. Note: for most companies, this 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 (i.e. achieve cost reductions while maintaining or improving quality/service) 2. Understand the category buying and management process, to identify improvement opportunities 3. Examine supplier relationships across the entire organization. Share best practices across the organization 4. Develop and implement multi‐year contracts since this is an attractive deal for suppliers 5. Leverage the entire organization's spend

Key Areas of Typical Spend Analysis

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

Two Main Business Ethic Approaches

1. Utilitarianism 2. Rights and Duties

Pain and Gain Share Agreements/Provisions

A type of supplier reward recognition system that penalizes suppliers for poor performance and rewards them when their performance is good.

Strategies for Strategic Items

Ensure availability of supply Focus on relationship building Encourage process integration and innovation Frequent communications Establish mutually agreeable supplier performance criteria

What are negotiations about?

Establishing a relationship that works well for both parties.

Strategic Alliance Development

Extension of a supplier development which refers to increasing a key or strategic supplier's capabilities. Results in better market penetration, access to new technology and knowledge, and higher ROI. Extends to second tier suppliers.

Strategic Items and Services

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