CH3 - Strategic procurement Flashcards
⭐Problems derived from outsourcing
▪ corruption ▪ differences in mentality and language ▪ transport costs ▪ delivery times ▪ customs issues ▪ quality ▪ know-how drain
In-house production (make) - Advantages
▪ effective control of quality and production ▪ confidentiality of development ▪ increasing core competencies ▪ efficient cooperation in R&D, purchasing, production ▪ improved utilization of equipment and personnel ▪ shorter reaction time
External procurement (buy) - Advantages
▪ lower costs for storage, security holdings, capital investment ▪ lower production depth and fixed costs ▪ fast adaptation to changes in demand ▪ less production risk, scrap costs and overtime ▪ benefits from the supplier’s manufacturing skills ▪ less machinery, facilities, equipment
⭐Using the resource based approach to the make or buy decision - How many questions do you have to answer with no to decide to buy and what are the questions?
The make-or-buy decision – The resource-based approach
- Do we have the capabilities required to make this product?
- Can we develop the required capabilities to make this product?
- Can we acquire the required capabilities to make this product?
Make-or-buy decision – Determining “competitiveness“ and “business
criticality“ helps to make the right decision
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‼‼Reasons to buy
Capacity
▪ levelling of own production capacity
▪ avoiding under-utilization of specialized production equipment
Investment
▪ no capital lockup through new investments
▪ focusing of financial resources to in-house production parts
Quality
▪ high quality through specialization of production resources
▪ using external intellectual property
Costs
▪ Reduced cost per unit through specialization and a high utility of the production resources
▪ Less fixed costs
▪ Less storage costs
‼‼Reasons to make
Capacity
▪ utilization of existing capacities
▪ staff
▪ production facilities
Investment
▪ reduction in taxable income through investments
▪ upgrade of production resources and their potentials
Quality
▪ ongoing control of quality
▪ acquisition of specific production know-how
Costs
▪ Saving supplier profit shares
▪ Saving external transportation and packing costs
▪ Independence from unfair increases in prices
⭐Name 3 tangible and intangible resources
Resources
Material and immaterial goods, assets and input factors owned by a company
Tangible: ▪ machinery ▪ raw materials ▪ locations ▪ financial
Intangible ▪ employees ▪ know-how ▪ patents ▪ brand name ▪ company image
Capabilities
Ability of a company to coordinate its resources and make best use of them
▪ organization of a company
▪ processes within a company
▪ appropriate leadership systems (incentives, planning and controlling)
⭐Core competencies
The resources and capabilities which are critical to success are said to be core competencies
▪ A core competence enhances a company’s competitive advantage by creating customer value.
▪ For competition purposes it must be hard to copy or even substitute the competence.
▪ The different businesses within a company must be similar at least in a way that they all relate to the core competence for it to be transferrable.
⭐Competence standards
- Low competence, low sustainability
are rather outsourced as the competences are neither distinct nor sustainable
⭐Competence potentials
- High competence, low sustainability
have to be protected from competitors and have to be developed in terms of sustainability.
⭐Competence gaps
- Low competence, high sustainbility
occur when the corporate position is not strong enough to create a competitive advantage. Further competences and customer benefits have to be established.
⭐Name 4 different procurement strategies
Strategic options for procurement
- Subject: individual vs. collective sourcing
- Supplier: insourcing vs. outsourcing
- Time: just-in-time vs. stock sourcing
- Object: modular vs. component vs. parts sourcing
- Area: Global vs domestic sourcing
Rating matrix of procurement stratetgies
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‼‼Advantages of Single Sourcing
Single Sourcing
- for highly complex goods and for products with intensive and long product developments.
- Procurement of certain goods from a single supplier (single source). Realization of synergies through a cooperative win-win relationship.
REQUIREMENTS
▪ involvement of supplier in product design
▪ contractual binding of suppliers for the entire product life cycle
▪ consequent support of suppliers through the company
▪ thorough pre-analysis of suppliers through the company
▪ need for intensive negotiations
PROS
▪ close cooperation
▪ lower prices through high volume orders
▪ lower order and transaction costs
▪ fewer suppliers and contacts
▪ less complexity of logistics and better control
CONS
▪ low flexibility
▪ short-dated changes are difficult and expensive
▪ dependence on suppliers (quality, price)
▪ revelation of company know-how
▪ bottlenecks in case of loss of supplier
Dual sourcing
- safety strategy to ensure supply and to promote competition between the suppliers
- Procurement object is obtained from two suppliers (dual source), which compete with
each other.
PROS
▪ close cooperation
▪ lower prices through high order volume
▪ improved security of supply
▪ lower order and transaction costs
▪ fewer suppliers and contacts
▪ less complexity of logistics and better control
CONS
▪ revelation of company know-how
▪ partial dependence on suppliers (quality, prize)
▪ medium flexibility
Multiple Sourcing
- for products with low specification and high standards, hence for C-items such as screws, office supplies, etc
- A company applies the same goods and services from multiple suppliers.
The concept of multiple sourcing has long been present in the automotive industry.
The rules are:
▪ no more than one third of the purchases from one supplier and
▪ its manufacturing capacity up to only a maximum of 50%
PROS
▪ risk reduction of production loss
▪ increasing competition among suppliers
▪ advantage in price negotiations for the purchasing company
▪ no dependence on a single supplier
CONS
▪ high transaction costs
▪ high order costs
▪ low discounts due to lack of volume bundling
Local sourcing
Goods and services are obtained from the direct neighborhood of the company. (i.e. regional)
In this procurement strategy several suppliers can be involved:
▪ The contracting company can build flexible business relationships with the suppliers.
▪ Due to the proximity to the local supplier, the procured objects can be obtained almost at the same time as the production sequence. Thus, logistical problems e.g. delivery delays caused by traffic jams are eliminated.
PROS
▪ supplier is located in close proximity
▪ lower transportation and additional expenses
▪ fewer country-specific problems in legal cases
▪ same mentality, language, currency
▪ high flexibility, high quality
CONS
▪ no hard price negotiations due to long-term contracts
▪ avoidance of international contacts and know-how
▪ frequently high prices
‼‼5 disadvantages of Global sourcing
- for mass production in low-wage countries if the prices outweigh the higher risks and costs make up for the transport.
- In global sourcing the goods are obtained worldwide. The internationalization of procurement increases the number of procurement options in a target-oriented way.
PROS
▪ worldwide selection of the most efficient suppliers
▪ new product know-how, favorable purchasing prices
▪ utilization of exchange rate fluctuations
▪ international contacts, risk diversification, lower
dependence
CONS
▪ currency risk, exchange rate fluctuations
▪ customs problems, high bureaucracy, corruption
▪ different mentality, language, venue
▪ lack of reliability, quality, risks, trademark and
patent infringement
▪ supply and logistics problems
Modular or System Sourcing
- a close, trustworthy and long-term cooperation between the company and the system supplier is necessary
- Entire sets of components are procured. As a result, there is only one direct contact with the system suppliers (direct suppliers). The system supplier in turn coordinates the processes with the subcontractors (indirect suppliers).
Cost reduction potentials with modular sourcing
▪ reduction in the number of direct supplier relations
▪ reduction in warehousing
▪ exploitation of supplier’s knowledge
▪ reduction in development time for new products and services
▪ reduction in the number of transport/logistics costs
PROS ▪ reduction of interfaces ▪ concentration on core competences ▪ maintains consistent quality ▪ immediate proximity to the supplier ▪ reduction of logistics costs ▪ flexibility in making changes ▪ Reduction in development time
CONS ▪ mutual dependence ▪ high coordination demands ▪ difficult to change supplier ▪ drain of company know-how
Collective sourcing
“Cooperation between companies is the voluntary co-work of legally independent companies with the intention of reaching a higher rate of success with objectives than as a stand-alone company”
Goal of collective sourcing:
• implementation of lower prices and better conditions
• ease of entering new sourcing markets
• cost reduction when entering new sourcing markets
• improved process efficiency in procurement
• expansion of global sourcing activities
• exchange of professional knowledge
PROS ▪ reduction in acquisition prices and processing costs ▪ reduction in capital lockup through bundled demands ▪ distribution of risk ▪ strengthening of negotiation power ▪ access to procurement know-how
CONS
▪ inter-company dependency
▪ implementation difficulties
▪ complexity with coordination and integration
• limited ability of transformation
• difficulties with anti-monopoly legislation
⭐ name 4 improvements after implementing JIT or JIS concepts in the supply chain
Just in time and Just in Sequence
Improvements and Pros and Cons
In order to avoid stock, the procurement objects are supplied at the time, when they are
needed in the manufacturing process.
IMPROVEMENTS
- Reduction of inventory costs
- Space reduction
- Decrease of handling costs
- Increase of supply quality
PROS ▪ increase in material handling up to 90% ▪ reduced scrap costs of up to 40% ▪ lower capital investment ▪ ▪ improvement in product quality ▪ improvement in supplier service ▪ shorter procurement time ▪ shorter development times CONS ▪ high dependence on the supplier ▪ high risk due to environmental influences (strikes) high transportation costs
JIT
▪ procurement strategy, synchronous to production which supplies the demanding unit with small quantities
without the need for approval or control of goods
▪ JiT is suitable as a delivery system for items with low usage variance and high volume (AX-goods), which are produced timely and supplied without interposition of a bearing on the installation site.
Just in sequence
▪ production-synchronic procurement strategy that links the points of consumption demand with subsets
cycle- respectively sequence exact provided, in lieu of a receipt of goods and testing
▪ Delivery takes place without a significant time buffer between delivery and installation time.
▪ Precisely timed delivery of this concept is limited to suppliers that have settled in the vicinity of the purchaser, in the so-called supplier park.
▪ Appears suitable for complex and customized modules and components for many different designs, colors and combinations.
▪ significant reduction of the supply chain’s inventories
▪ difficulties in information technology control for JiS
▪ OEMs and suppliers must additionally obviate the risk of production losses
Portfolio analysis
The term “portfolio technique” evolved in the banking sector. It is the optimal composition of an equity depot considering risk and return (equity-loans).
Aims of the portfolio analysis (among others):
▪ identification of risks in the procurement market
▪ evaluation of opportunities offered by the procurement market
The procedure for a situation analysis can be divided into three steps:
- definition and selection of the strategic resource units
- identification and classification of success factors for the specified strategic resource units
- positioning of the strategic resource units in a matrix
Strategic resource units
The clearer the definition of the resource units or the definition of goals, the more meaningful the portfolio matrix is (not in excessive or conflicting aims in the matrix).
Definition of the strategic resource units can be:
▪ procurement objects: dangerous goods, bottleneck items, Just-in-time parts, Just-in-sequence
components, high-technology products
▪ global sourcing, single sourcing, modular sourcing
▪ supplier/manufacturer power: make-or-buy, monopolist or perfect competition
There are various strategies to secure the supply. The choice of strategy depends on the type of article: ▪ strategic items ▪ leverage products ▪ bottleneck items ▪ non-critical items
Portfolio technique in procurement - security of supply: Strategic items
High procurement complexity, High impact on results • alliances, cooperation • supplier integration • joint project strategies • long-term commitment
Portfolio technique in procurement - security of supply: Bottleneck items
High procurement complexity, low impact on results • move into other quadrant • supplier substitution • material substitution • risk minimization
Portfolio technique in procurement - security of supply: Uncritical items
Low procurement complexity, low impact on results
•smooth processes (automation)
• reduction of suppliers
• facilitate logistics
Portfolio technique in procurement - security of supply: Leverage products
Low procurement complexity, high impact on results
• exploit market power
• international procurement
• medium-term commitment
Business process modeling
In scope applicable acrros industries:
- Top level of the pyramid: configuration of the supply chain to core management processes
- Level 2 of the pyramid: further delineation of the core management processes into process categories
- Level 3 of the pyramid: description of the process elements performed to execute process categories
Industry specific
- Level 4 of the pyramid: description of the industry specific activities to perform process elements
Benchmarking performance
▪ hierarchical approach to measure the performance of the supply chain processes
▪ identifies the main performance gaps and positioning compared to competitors
▪ metrics include more than 150 KPIs
▪ performance targets include, for example, supply chain reliability, responsiveness, flexibility and costs
Best practice analysis
▪ identifies the required activities to close the performance gaps in supply chain optimization, risk management and environmentally responsible supply chain management
▪ best practices have to be current, structured, proven, repeatable, have an ambiguous method and a positive impact on results
▪ SCOR includes more than 400 best practices, e.g. management practices
