Strategic Sourcing

The five 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

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.

Sourcing strategy entails

Managing purchasing transactions in a strategic way. Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization.

T/F A regular review of an organization's sourcing strategy is a must in order to achieve significant agreed upon results.

True

T/F Single-source is risky.

True

PAIN

Using a penalty or punishment is a negative outcome for poor performance, cost overruns, quality problems, etc.: financial penalty reduce future business bill-back amount

Vendor Managed Inventory (VMI)

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

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.

Strategic Alliance Development results in...

1. Results in better market penetration access to new technologies and knowledge, and higher return on investment, and 2. Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances.

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.

Strategic Sourcing 3

A comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category.

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.

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 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.

T/F

Agreements could be negotiated to spell out in detail the gains (reward) and pains (penalty) that the supplier will realize for either exceptional or poor performance.

VMI: from the supplier's perspective

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

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

Supplier Certification:

Certification procedures verifying that a supplier operates, maintains, improves, and documents effective procedures that relate to the customer's requirements (e.g., cost, quality, delivery, flexibility, maintenance, safety, etc.)

Sole Sourced

Contrasts Single Source a situation where there is only one supplier for an item, i.e., sole sourced. Sole source is 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.

Companies that seek to create ethical policies to ensure compliance in this areas should:

Create a Supplier Code of Conduct AND create specific provisions within supplier agreements accordingly.

A significant concern in the Strategic Sourcing process is:

Ethics and Sustainability

Sustainable Sourcing Should Seek To:

Grow Revenues Reduce Costs Go "Green" Manage Risk Build Intangible Assets

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 Optimize the number of global suppliers. Note: for most companies, this means a reduction in the number of suppliers. Deliver more innovative products, in less time, and less expensively than competitors

T/F

One of the elements for building a strong strategic supplier partnership is having a well-defined and established Supplier Certification program

The most important driver of strategic sourcing:

Optimize the number of global suppliers. Note: for most companies, this means a reduction in the number of suppliers.

Insourcing:

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

The following are some commonly used criteria of Supplier Selection

Product and process technologies Reliability Quality Order system and cycle time Cost Willingness to share information Capacity Service Communication capability Location

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

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

Strategic Sourcing 2

Strategic sourcing requires analysis of what an organization buys, from whom, at what price and at what volume.

T/F

Successful sourcing strategies are almost always different for functional products versus innovative products.

VMI: from the 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.

What is most important about strategic sourcing

The focus on development of long-term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals

Supply Base

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

Sourcing

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

The two (2) main ethical approaches are:

Utilitarianism and Rights and Duties

Strategic Alliance Development

an extension of supplier development to increasing a key or strategic supplier's capabilities.

Strategic Sourcing

can be defined as 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.

Leverage

commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings.

Co-Managed Inventory (CMI)

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

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

Corporate Social Responsibility (CSR)

is the practice of business ethics

Utilitarianism

that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct.

Bottleneck

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

Suppler Performance Reward Incentives include:

The promise of future business Public recognition Cash back for achieving performance-based objectives Strategic or preferred supplier status

Outsourcing

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

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

T/F 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.

True

T/F 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 certification process

True

T/F Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.

True

T/F How Many Suppliers to Use: current trends favor using fewer sources.

True

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

True

T/F 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.

True

T/F Supplier Selection is typically conducted by a cross functional team.

True

T/F Supplier certification programs are used to differentiate strategic supplier alliance candidates from others

True

T/F The concept of Supplier Co-location is very similar to VMI and CMI, except that with Supplier Co-location a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders.

True

T/F 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.

True

Supplier Co-location

where a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders.

Non-Critical

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

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

Spend Analysis

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

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.

Reasons for Multiple Suppliers

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

What are the 4 sourcing categories

Non-Critical Bottleneck Leverage Strategic

Rewarding Supplier Performance

Recognition of a supplier for exceptional performance, contributions, and/or capabilities.

Distributive Negotiations:

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

Strategic sourcing includes automation of:

Request for Quote (RFQ) Request for Proposal (RFP) Electronic Auctioning (e-auction or reverse auction) Contract Management

Sustainability

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.

Rights and Duties

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

Strategic

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