Chapter 6: Strategic Sourcing

Vendor Managed Inventory from supplier's perspective

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

Developing Strategy for Functional Products

MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition (office supplies, food staples, etc) * potential strategy: Reliable, low cost suppliers. Multi-sourced

Supply Base Rationalization (AKA supply base reduction, Supply base optimization)

Reduction in the supply base to the lowest number of suppliers possible without increasing risk * Buyer-supplier partnerships are easier to manage with a rationalized supply base. can result in - reduced purchase prices - Fewer supplier management problems - Closer and more frequent interaction between buyer and supplier - Greater levels of quality and delivery reliability

Reverse Auctions

Sourcing technique where pre-qualified supplier enter a website and at a pre-designated time and date, and try to underbid competitors to win the buyer's business. * The buyer makes potential sellers aware of their intent to buy a specific good or service * During the course of the actual reverse auction event, the sellers bid against one another to secure the buyers business, driving the price to be paid for the item downward * Bid prices are monitored until the session is officially over. The winning bidder is the seller who offers the lowest price * Reverse auctions are used by private companies, public sector agencies, and non-profit organizations

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 a trusted partner who knows the buyers organization, processes, procedures, and requirements * Provides a higher value than their competitors and are characterized as reliable, responsive and flexible, and cost effective

Strategic Alliance Development

An extension of supplier development to increasing a key or strategic supplier's capabilities - Results in better market penetration, access to new technologies and knowledge, and higher return on investment - Eventually extends to a firm's second tier suppliers as the firms key suppliers begin to form their own alliances

How many suppliers to use

Current Trends favor using fewer sources but single source is risky

Objectives of Strategic Sourcing

Objectives surround the reduction of cost whole maintaining or improving quality * Improve the value to price relationship * Understand category buying and management process, to identify improvement opportunities * Examine supplier relationships across the entire organization * Develop and implement multi-year contracts with standardized terms and conditions across the organization * Leverage the entire organization's spend * Share best practices across the organization

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

Distributive Negotiations

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

Rights and Duties

Some actions are just right in and of themselves, regardless of the consequences. DO THE RIGHT THING

Vendor Managed Inventory (VMI)

Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer - A confirmed order is independently created by the supplier who is then responsible to deliver the item and bill the buyer for the materials delivered

Strategic Alliance

an 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 a mutual benefit * Preferred suppliers are potentially ideal candidates for a strategic alliance

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

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 - in simple terms, do not mortgage the future for the present - companies must consider (worker safety, wages, working conditions, humans rights, etc)

Ethical sourcing

that which attempts to take into account the public consequences or organizational buying, or to bring about positive social change through organizational buying behavior * Procurement needs to ensure that the products are 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

Corporate social responsibility (CSR)

the practice of business ethics

Bottleneck items: Sourcing strategies

1. Maintain safety/ strategic stock 2. Develop contingency plans 3. Strengthen relationships 4. Search for alternatives

Preferred suppliers provide

- product and process technology, and expertise - Product development and value analysis - information on latest trends in materials, processes, or designs - Capactiy for meeting unexpected demand - Cost efficiency due to economies of scale

Goals of sustainable sourcing

* Grow Revenues - growing the company through the launch of new sustainable products * Reduce costs - increasing resource efficiencies which will also help to reduce costs * Go "Green" - ensuring that the products or materials used meet environmental objectives for things like waste reduction, reuse, and recycling * Manage Risk - Link company brands to the social consciousness of consumers * Build Intangible Assets - Such as social and environmental responsibility, increasing consumer awareness of sustainable sourcing and sustainability

Reasons for Multiple Sources

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

Framework for sourcing strategy development

1. Classify the company's products and suppliers as belonging either to 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 information on suppliers capabilities. Use RFI 7. Develop a supplier portfolio 8. Develop a future state (Vision of what company wants future to look like) 9. Conduct supplier selection negotiation 10. Implement Supplier Relationship management (SRM)

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category * The focus on development of long term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals * From an information technology perspective, strategic sourcing includes automation of (RFQ, RFP, electronic auctioning, contract management) * Requires analysis of what an organization buys, from whom, at what price, and at what volume

Rewarding supplier performance

Rewarding suppliers for outstanding performance motivates and encourages them to continue to strive for excellence, while also strengthening and fostering strong and productive supplier relationships. * Reward incentives can include: - The promise of future business - Public recognition including any or all of the following (plaque, awards dinner, press release, etc) - Cash back for achieving performance based objectives - Strategic or preferred supplier status

Pain and Gain Share Agreements: Pain

Using a penalty or punishment as a negative outcome for poor performance, cost overruns, quality problems, etc. - Buyer could impose a financial penalty on the supplier for poor performance - 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

Co-Managed Inventory (CMI)

an arrangement where a specific quantity of an item is stored at the buyer's location - once used, the item is replaced by the supplier, with the full knowledge and approval of buyer - the buyer provides systems access to the supplier, and the supplier takes responsibility for managing the replenishment process in the buyer's system accordingly - the supplier reviews all of the available information and generates orders in the buyer's system - The primary difference between CMI and VMI is that in CMI the supplier is just recommending an oder which is not confirmed until and unless the buyer approves

Supplier Certification

procedures verifying that a supplier operates, maintains, improves, and documents effective procedures that relate to the customer's requirements (ex: cost, quality, delivery, flexibility, maintenance, safety, etc) * Supplier certification programs are used to differentiate strategic supplier alliance candidates from others * Companies may choose to develop internal certification programs, and many also require external certifications such as ISO 9000/ ISO 14000 as part of their overall certication process

Ethical Policies should include

* create a supplier code of conduct and require all suppliers to formally agree * inform suppliers of ethical sourcing expectations and create specific provisions within supplier agreements accordingly * Determine where all purchased goods originate and the manner in which they are made * Have knowledge of their suppliers' workplace principles * Seek independent verification of supplier compliance with ethical standards * Include ethics as part of their supplier performance rating system * Routinely report supplier compliance to key stakeholders

Benefits of Strategic Alliances

- Potential to increase revenue 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 future strategic opportunities

Vendor Managed Inventory from Buyer-firm's perspective

- Supplier tracks inventories - 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 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

Leverage Items: Sourcing strategies

1. Consolidate volume as a negotiation tool 2. Use competitive marketplace to reduce costs 3. Automate supplier interfaces to minimize process related costs

Basic steps for conducting a spend analysis

1. Define 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 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

Strategic items: Sourcing strategies

1. Ensure availability of supply 2. Focus on relationship building 3. Encourage process integration and innovation 4. Frequent communications 5. Establish mutually agreeable supplier performance criteria

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 cycle times 6. Optimize the number of global supplier (for most companies this means a reduction in number of suppliers) 7. Deliver more innovative products, in less time, and less expensively than competitors

Sourcing Categories

1. Non Critical - routine items that involve a low percentage of the firms total spend and involve very little supply risk 2. Bottleneck - unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers 3. Leverage - commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings 4. Strategic - Strategic items and services that involve a high level of expenditure and are vital to the firms success.

Non Critical Items: Sourcing strategies

1. Simplify and streamline the purchasing process 2. Reduce number of suppliers and simplify ordering 3. Transfer buying responsibility to users within the company

5 key areas of a 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

Single-Source

A sourcing strategy where there are multiple potential supplier available for a product or service, however, the company decides to purchase only from one supplier * this is in contrast to sole sourced where there is only one supplier

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 * Confirming the alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential * Consequently, negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties

Developing Strategy for Innovative Products

Characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition (tech products such as iPhone) * Potential Strategy: Innovative, high tech, cutting edge, market leading supplier. Long term partnership. Single sourced

Spend Analysis

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

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

Outsourcing

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

Pain and Gain Share Agreements: 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 - Buyer could share a portion of any cost reductions developed by the supplier which benefit the buyer. - Buyer could provide access to in-house training seminars, conferences, tools and information, or other resources to the supplier - Buyer could publicly recognize the supplier and or confer a special status on the supplier such as "preferred supplier", "partner", "Supplier of the year", etc

Supplier Co-location

Very similar to VMI and CMI except that a representative of the supplier is actually embedded in buyer's purchasing department to forcast 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 orders - 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