SCM: Ch. 5 - Sourcing Materials and Services

Core principles of strategic sourcing

1. Assess total value: Emphasis beyond acquisition cost, evaluating total cost of ownership, and the value of the supplier relationship. 2. Develop individual sourcing strategies: Individual spend categories need customized sourcing strategies. 3. Evaluate internal requirements: Requirements and specifications thoroughly assessed and rationalized as part of the sourcing process. 4. Focus on supplier economics: Suppliers' economics understood before identifying buying tactics (e.g. volume leveraging, price unbundling, price adjustment mechanisms). 5. Drive continuous improvement: Strategic sourcing initiatives as subset of continuous improvement process for procurement and sourcing organizations.

Types of purchasing activity

1. Capital goods 2. Rebuy (standards & modifications) 3. Maintenance, repair, operations (MRO)

Unique aspects of strategic sourcing

1. Consolidation and leveraging of purchasing power 2. Emphasis on value 3. More meaningful supplier relationships 4. Attention directed to process improvement 5. Enhanced teamwork and professionalism

Strategic sourcing process

1. Develop Strategic Plan 2. Understand Spend 3. Evaluate Supply Sources 4. Finalize Sourcing Strategy 5. Implement Sourcing Strategy 6. Onboarding and Transitioning 7. Collaborative Process Improvement

E-sourcing and E-procurement Functionality

1. Industry analysis and supplier identification 2. Analytical tools 3. Contract management of RFI/RFP processes 4. Process automation 5. Online negotiations 6. Collaboration tools 7. Logistics procurement Management 8. Project management 9. Knowledge management 10. Contract management

Types of e-commerce business models

1. Sell-side system: Online businesses selling to individual companies or consumers. Ex. Staples (www.staples.com), Wal-Mart (www.walmart.com), CNET (www.cnet.com) Electronic marketplace: A seller-operated service that consists of a number of electronic catalogs from suppliers within a market (one-stop sourcing site for buyers). Ex. Expedia.com (www.expedia.com), Amazon (www.amazon.com), eBay (www.ebay.com) 3. Buy-side system: A buyer-controlled e-procurement or e-commerce service that is housed on the buyer's system and is administered by the buyer. Ex. Elemica (elemica.com) 4. Online trading community: A system maintained by a 3rd party technology supplier where multiple buyers & sellers in a given market can conduct business. Ex. Travelocity (www.travelocity.com), Priceline (www.priceline.com)

Strategic Evolution of Sourcing Process

1. Traditional sourcing: - Tactical sourcing - Functional purchasing - Limited, known supply base - Multiple quotes - Search for best price 2. Strategic sourcing: - Supplier relationships - Expanded, non- traditional supply base - Total cost or Total Cost of Ownership 3. E-enabled procurement: - E-sourcing - E-procurement - E-commerce 4. Integrated sourcing/supply chain: - Sourcing a strategic supply chain process - Supply chain visibility of sourcing decisions - Seamless, integration of sourcing and supply chain activity

Develop Strategic Plan

1st step in strategic sourcing; Create cross-functional planning committee Identify key members of sourcing team Agree on scope of sourcing processes

Understand Spend

2nd step in strategic sourcing; Refine understanding of sourcing needs of process-owners, with the nature of the requirement being represented by some type of measurable criteria. Perform spend analysis to: - Understand spend by supplier, category, and internal user - Profile current sourcing approaches and areas for improvement Address issues of make vs. buy

Supplier portfolio screening

3rd-5th step in strategic sourcing; 1. Initial Supplier Research and Screening (Market Analysis & Alternative Supplier Evaluation) 2. Request for Information (RFI) 3. Request for Proposal (RFP) 4. Supplier Site Visits 5. Supplier Selection Supplier selection criteria: 1. Quality 2. Reliability 3. Risk 4. Capability 5. Financial 6. Desirable qualities 7. Sustainability

Onboarding and Transitioning

6th step in strategic sourcing; Finalize understandings and agreements with suppliers Create management processes for new suppliers Conduct transition and onboarding processes

Collaborative Process Improvement

7th step in strategic sourcing; Regular feedback and communications Analyze net savings and compare with goals and objectives Process improvement for both suppliers and customers

Procurement

A process involving managing a broad range of activities within the procurement process (e.g. supplier selection, price negotiation, contract management, supplier performance management).

Strategic sourcing

A process involving managing procurement priorities such that they are well-aligned with goals and objectives of the supply chain and of the overall organization.

Advantages/concerns of e-procurement

Advantages: 1. Lower operating costs (reduce paperwork & sourcing time, improve control over inventory & spending) 2. Improve procurement and sourcing efficiency (find new supply sources, improve communications, improve personnel use, lower cycle times) 3. Reduce procurement prices (improve comparison shopping, reduce overall prices paid) Concerns: 1. Cyber-security 2. Lack of face-to-face contact between the buyer and seller 3. Technology-related concerns (lack of standard protocols, system reliability, time & money investment)

Purchasing

An activity that follows conduct of a formal sourcing process involving managing a firm's acquisition procedures and standards, involving largely transactional activity of the buying of products & services.

The quadrant technique

Not all items /services purchased are of equal importance, requiring varying procurement strategies based on their value and risk. - Distinctives (high risk; low value/profit potential): engineered items - Criticals (high risk, high value): unique items that are critical to final product - Generics (low risk; low value): office supplies & MRO items - Commodities (low risk, high value): basic production items, basic packaging, and logistics services

Total landed cost (TLC)

The cost of a product plus all the costs driven by logistics activities. Tangible/visible cost: - purchase/acquisition cost Additional revenant costs: - life-cycle costs - quality costs - inventory costs - management costs - costs of disposition - strategic sourcing costs - technology costs - cost impact on other function areas - other logistics cost