chapter 6 supply chain management

Objectives of strategic sourcing

the reduction of cost while maintaining or improving quality: Improve the value‐to‐price relationship (i.e. achieve cost reductions while maintaining or improving quality/service) Understand category buying and management process, to identify improvement opportunities Examine supplier relationships across the entire organization

Strategic alliance

A strategic alliance in sourcing, is 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. The benefits of these types of arrangements include: 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.

drivers of strategic sourcing

Companies spend significant time and resources developing and implementing Strategic Sourcing initiatives to: Improve long-term financial performance Increase customer focus Improve product quality Reduce the cost of materials Reduce delivery cycle times

Business ethics and ethical sourcing

Corporate Social Responsibility (CSR) is the practice of business ethics Business Ethics is the application of ethical principles to business. The two (2) main ethical approaches are: 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. Rights and Duties: some actions are just right in and of themselves, regardless of the consequences. Do the right thing! Ethical Sourcing is 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.

developing successful sourcing strategies

Functional Products - MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc. Potential Strategy: Reliable, low cost suppliers. Multi-sourced. Innovative Products - characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone Potential Strategy: Innovative, high-tech, cutting edge, market leading supplier. Long term partnership. Single-sourced.

sustainable sourcing should seek to:

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

Sourcing strategies

Insourcing: Producing goods or services using a company's own internal resources. Outsourcing: The traditional definition involves purchasing an item or service externally, which had been produced using a company's own internal resources previously. 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. 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.

sourcing categories

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

pain and gain

Pain: Using a penalty or punishment is a negative outcome for poor performance, cost overruns, quality problems, etc.: Buyer could impose a financial penalty (i.e., fine) 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. 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 benefit the buyer.

Additional sourcing concepts

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. Vendor Managed Inventory (VMI) - Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer Co-Managed Inventory (CMI) is 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. In CMI, 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 order which is not confirmed until and unless the buyer approves it.

Rewarding supplier performance

Rewarding suppliers for outstanding performance motivates and encourages them to continue to strive for excellence in their products, services, and operations. It also strengthens and fosters strong and productive supplier relationships.

supplier base

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. Supply Base Rationalization (also known as, 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, and they 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

Sustainable sourcing

Sustainability is 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 considering things like worker safety, wages, working conditions, human rights, etc.

strategic sourcing

an approach to supply chain management that formalizes the way information is gathered and used allowing an organization to leverage its consolidated purchasing power finding the best values in the marketplace. It differs from conventional purchasing because it places emphasis on the entire life-cycle of a product, not just its initial purchase price.

Negotiating Win-Win Strategic Alliance Agreements

negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties.

Preferred suppliers

A supplier of choice (top supplier for company) 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. Preferred suppliers provide: Product and process technology, and expertise. Product development and value analysis. Information on latest trends in materials, processes, or designs. Capacity for meeting unexpected demand. Cost efficiency due to economies of scale.

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 firm's key suppliers begin to form their own alliances.