Lecture 08_Sourcing and Procurement Flashcards
Outsourcing
Disadvantages
- Agency-Problems
− Hold-up: renegotiations
− Moral-Hazard: opportunistic behavior - Loss of flexibility
Outsourcing
Advantages
- Low costs
- Concentration on core competences
− Lean processes (lean manufacturing) - Access to key technologies
- Low capital requirements
Outsourcing Matrix
Strategic Importance of competence
vs.
Level of competitiveness relative to suppliers
High Comp / low Strategic
**Maintain/Invest (opportunistically) **
- competencies not strategic but provide advantages
- keep in house as long these advantages are integrally real
High Comp/Highly Strategic
In-House Invest
Low Comp / low Strategic
Outsource: competencies have no competitive advantage
Low Comp / Highly Strategic
Collaborate / maintain control
- competencies strategic but insufficient to compete effectively
- explore alternatives such as partnerships, alliance, joint-venture, licensing
Outsourcing
vs.
Insourcing
- Specificity [Design, know-how, logistics]
- Strategic importance
- Uncertainty [quantities, data]
- frequency
Outsourcing
1. low specifity
2. small strategic importance
3. low uncertainty
4. small frequency
Insourcing
1. high specificity
2. big strategic importance
3. high uncertainty
4. high frequency
Break Even Analysis
**Insourcing dominates, if **
K(M) <= K(B) and c(M) < c(B)
K(M) <= K(B) and c(B) < c(M)
Q < [K(B) - K(M)] / [c(M) - c(B)
K(M) >= K(B) and c(B) > c(M)
Q < [K(M) - K(B)] / [c(B) - c(M)
Scoring Method
Integrated assessment of several criteria with an one-dimensional value (score)
Single Sourcing
- Bargaining power of supplier
- Quantity discounts
- Economies of scale
- Shared research and development
- Advantages of a long-term partnership
- Reduction of complexity through joint process optimization
- Incentivize sustainability through regular audits and investments in supplier development
Multi-Sourcing
1. Supplier competition leads to decreasing cost
2. Risk diversification
* Lead time
* Reliability of shipments
* Flexibility
* Capacity constraints
* Local-content-regulations
Global Sourcing
- International price and cost differences
- Exchange rate fluctuations
- Transport times (inventory)
- Shipment reliability (risks)
- Different (multi-modal) carriers
- Political dependence
- Emissions from transportation
Local Sourcing (Friendshoring, Reshoring)
- Short lead time and transportation time
- **Low shipping costs **for high-volume or heavy goods
- More control over supplier sustainability (audits are easier)
Contract Design
Risk Sharing
-
Buy back contracts: Suppliers agrees to buy back unsold inventory (up to certain amount, at agreed
price) - Revenue sharing: Supplier participates at retailer’s sales
- Quantity flexibility: Orders can be changed after observing demand
Procurement Portfolio
Matrix
Importance of Purchasing
vs.
Complextiy of MArket
High Importance of Purchasing / Low complexity of Market
Leverage
- price based procurement
- combination of contracts / spot market
Low Importance of Purchasing / Low Complexity
Standard
- short term contracts /spot market
- efficient processes
High Importance / high complexity
Strategic
- long-term contracts
- risk analysis
- market research
low importance / high complexity
Bottleneck
- long-term contracts
- safety stocks
- market observation
Calculate Effective Lead time with order spltting from suppliers
Modular Sourcing
- Traditional: Supplier - Manufacturer
- Supplier – System supplier– Manufacturer
- Further reduction of the number of suppliers
Standardization
Disadvantage
vs.
Advantage
Product Variety
Disadvantage:
higher procurement prices
Advantage:
- Lower transaction costs
- lower inventory
- (Possibly) economies of scale
