Supply Chain Management Chapter 6: Strategic Sourcing

strategic sourcing includes automation of:

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

Collaborative Negotiations

-Work together to maximize the outcome or create a win-win -Requires open discussions and free-flow of information. -Not about obtaining the most value, about establishing a relationship that works well for both parties.

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

Non-Critical

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

Leverage

(Low-High): commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings.

Preferred Suppliers: 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. -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.

Benefits of VMI for Buyer/firm

-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.

Vendor Managed Inventory (VMI)

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

Supplier Reward Incentives

-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

Reasons for a Single Supplier (Risky)

-To establish a good relationship -Less quality variability -Lower cost [100% of volume] -Transportation economies -Proprietary product or process -Volume too small to split

Spend Analysis

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

Strategic Sourcing

Managing a firm's external resources in ways that support the long-term goals of the firm. -A comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category.

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.

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 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.

Gain

-Buyer could award a financial bonus -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"

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.)

Functional Products

-MRO items -low profit margin items with stable demands and high levels of competition Examples: office supplies, food staples Potential Strategy: Reliable, low cost suppliers. Multi-sourced

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)

Spend Analysis Basic Steps

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, and to reduce the number of suppliers per category. 7. Repeating the process on a regular schedule.

Why 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 (i.e., Lead times) 6. Optimize the number of global suppliers. Note: this means a reduction in the number of suppliers. 7. Deliver more innovative products, in less time, and less expensively than competitors

Pain and Gain Share Agreements / 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

High-Level Sourcing Strategies

Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization. 1. Insourcing 2. Outsourcing 3. Single Sourcing: Purchase from only one of the available suppliers. (different from sole source, where only one supplier available). 4. Multiple Sourcing: creates competition between suppliers

Supplier Selection Criteria

Conducted by a cross functional team -Product and process technologies -Reliability -Quality -Order system and cycle time -Cost -Willingness to share information -Capacity -Service -Communication capability -Location

Supply Base

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

Strategic

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

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

Distributive Negotiations

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

JIT 2 (a.k.a. Suppler Co-location)

Same as VMI and CMI, except a representative of the supplier is embedded in buyer's purchasing department 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. -JIT 2 benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization.

Sourcing

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

Sustainability

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 -don't mortgage future for the present

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.

Ethical Sourcing

attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior. -Products acquired in a responsible and sustainable way. -Laborers treated fairly in a safe environment -consider environmental and societal impacts of souring.

Innovative Products

characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition Examples: technology products such as the iPhone Potential Strategy: Innovative, high-tech, cutting edge, market leading supplier. Long term partnership. Sole-sourced.

Co-Managed Inventory (CMI)

is an arrangement where a specific quantity of an item is stored at the buyer's location. -Supplier responsible for replacing used items. -Difference between VMI and CMI is that CMI is just recommending an order that is not confirmed until and unless the buy approves.

Business Ethics

the application of ethical principles to business

Corporate Social Responsibility (CSR)

the practice of business ethics

What does Strategic Sourcing Require?

"analysis of what an organization buys, from whom, at what price and at what volume." It differs from conventional purchasing because its the entire life-cycle of a product, not just its initial purchase price.

Bottleneck

(High-Low): unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers.

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. -Reverse auctions are used by private companies, public sector agencies, and non-profit organizations.

Benefits of VMI for Supplier

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

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

Objectives of strategic sourcing: reduction of cost while maintaining or improving quality

-Improve the value‐to‐price relationship (i.e. cost reductions while maintaining quality/service) - 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 -Leverage the entire organization's spend -Share best practices across the organization

Reasons for Multiple Suppliers

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

General Portfolio Spend Categories

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

Benefits of a Strategic Alliance

-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.

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.

Benefits of a Rationalized Supply Base

-Reduced purchase prices -Fewer supplier management problems -Closer and more frequent interaction between buyer and supplier -Greater levels of quality and delivery reliability

Ethical Policies should include

-supplier Code of Conduct, 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

Five key areas of a Spend Analysis

1. Total historic expenditure and volumes 2. Future demand projections or budgets 3. Expenditure categorized by commodity and sub-commodity 4. Expenditure by division, department, or user 5. Expenditure by supplier

Two main ethical approaches

1. 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. 2. Rights and Duties: some actions are just right in and of themselves, regardless of the consequences. Do the right thing!

Focus of Strategic Sourcing

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