Supply Chain Chapter 6

Pain and Gain Share Agreements / Provisions

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. 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. Both parties would mutually agree on the provisions and the positive and negative outcomes. -Pain: Using a {penalty or punishment} as 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.

Spend Analysis

Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance. The basic steps for conducting a spend analysis include: 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. -etc. 7.Repeating the process on a regular schedule.

Ethical Policies Should Include:

Companies that seek to create ethical policies to ensure compliance in this areas should: -Create a Supplier Code of Conduct and require all suppliers to formally agree to abide by the code as a condition of being an approved supplier. -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

Functional Products

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.

Pain and Gain Share Agreements / Provisions

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. -Buyer could provide access to in-house training seminars, conferences, tools and information, or other resources to the supplier. -Buyer could publically recognize the supplier and /or confer a special status on the supplier such as "Preferred Supplier", "Partner", "Supplier of the Year", etc.

Innovative Products

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.

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. A regular review of an organization's sourcing strategy is a must in order to achieve significant agreed upon results.

Rewarding Supplier Performance

Recognition of a supplier for exceptional performance, contributions, and/or capabilities. 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.} Reward incentives can include: -The promise of future business -Public recognition including any or all of the following: A plaque An awards dinner An honors ceremony A press release Formal communication to the supplier's senior leadership team. Cash back for achieving performance-based objectives {Strategic or preferred supplier status}

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!

Sourcing Categories Bottleneck

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

Strategic Sourcing

A comprehensive approach for locating and sourcing key suppliers, so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace. -Requires analysis of what an organization buys, from whom, at what price, and at what volume. -Emphasis is placed on the entire life-cycle of a product, not just its initial purchase price.

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. This is in contrast to 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.

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. -The sellers bid against one another to secure the buyer's 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.

Preferred Suppliers

A supplier who best meets your company's overall purchasing requirements. 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 {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 which refers to increasing a key or strategic supplier's {capabilities.} -Results in better market penetration, access to new technologies and knowledge, and a 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

Business Ethics and Ethical Sourcing

Most companies today have some type of Corporate Social Responsibility program. Frequently these programs also require suppliers to agree to abide by a Supplier Code of Conduct in order to be considered an approved supplier.

Sourcing

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

Sourcing Categories Leverage

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

Sustainable Sourcing Programs Should Try 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 Risks -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 Reasons for Multiple Suppliers

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

Sourcing strategies 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

Framework for Sourcing Strategy Development

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)

How do companies spend significant time and resources developing and implementing Strategic Sourcing initiatives to?

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

Spend Analysis 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

Sourcing Strategies

Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization. High-level sourcing strategies include: -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. The term has more recently become synonymous with the concept of buying an item from an external source of supply regardless of whether the item had been previously produced using a company's internal resources.

Sourcing Strategies by Category

Bottleneck items: : -maintain safety/strategic shock -Develop contingency plans -Strengthen relationships -Search for alternatives Strategic Items: -Ensure availability of supply -Focus on relationship building -Encourage process integration and innovation -Frequent Communications - Establish mutually agreeable supplier performance criteria Non critical items: -Simplify and streamline the purchasing process -Reduce number of suppliers and simplify ordering -Transfer buying responsibility to "users" within the company Leverage items: -Consolidate volume as a negotiation tool -Use competitive market place to reduce costs Automate supplier interfaces to minimize process related costs.

Additional Sourcing Concepts - Vendor Managed Inventory

Suppliers directly {manage buyer inventories} to reduce the buyer's inventory carrying costs and avoid stockouts for the buyer From the buyer-firm's perspective: -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. 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

Additional Sourcing Concepts - Supplier Co-location

The concept 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. -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.

Supplier 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 significantly 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

Negotiating Win-Win Strategic Alliance Agreements

X Distributive Negotiations: Refers to a process that leads to self-interested, one-sided outcome {Check mark }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. -Alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential. -Negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties.

Use of Artificial Intelligence in Supplier Selection

can improve supplier selection and increase the effectiveness of supplier relationship management Supplier-related risks are a major consideration for supply chain professionals Just one mistake on the part of a supplier, and a company's reputation can be damaged significantly. It can quickly and thoroughly {analyze supplier-related data} such as on-time in-full delivery performance, audits, evaluations, and credit scoring and provide information to use for future decisions regarding certain suppliers. As the result, a company can {make better supplier decisions} and improve its customer service.

Successful sourcing strategies are almost always

different for functional products versus innovative products.

Objectives of strategic sourcing

involve the reduction of cost while maintaining or improving quality: 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 with standardized terms and conditions across the organization 5.Leverage the entire organization's spend

Strategic Alliance

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

Additional Sourcing Concepts - Co-Managed Inventory

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. -The buyer provides systems access to the supplier, and the supplier takes responsibility for managing the replenishment process in the buyer's system. -The supplier reviews all of the available information and generates orders in the buyer's system. -The primary difference from VMI is that in CMI the supplier is just recommending an order which is not confirmed until and unless the buyer approves it.

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

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. -Do not mortgage the future for the present. -Companies must considering worker safety, wages, working conditions, human rights, etc. Establishing a sustainable procurement process takes work The company involved must understand the value of incorporating sustainable standards into their sourcing goals

Corporate Social Responsibility (CSR)

is the practice of business ethics

Supplier Selection

is typically conducted by a cross functional team. The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards. The following are some commonly used criteria: -Cost -Quality -Capacity -Service -Location -Reliability -Communication capability -Order system and cycle time -Willingness to share information -Product and process technologies

Sourcing Categories: Non-Critical

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

Sourcing Categories Strategic

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