Lecture 6: Global sourcing and procurement Flashcards
Define strategic sourcing and what it is
Definition: Development and management of supplier relationships to acquire goods and services in a way that aids in achieving the needs of a business.
- Focused on the Total Cost of Ownership (TCO)
- Getting the best product/service at the best value
- Driven by a rigorous and collaborative approach
- Addresses ALL levels of savings
- Decisions based on fact-based analysis and market intelligence
- A continuous process
How to calculate totol cost of ownership?
› Total cost of ownership = procurement costs +after purchase costs
After purchase costs include installing, deploying, using, upgrading, maintaining, etc. costs
What are the objectives of strategic sourcing?
› Reducing costs while maintaining or improving quality/service
- For example, 1) develop and implement multi-year contracts with standardized terms and conditions across the organizations
2) Share best practices across the organizations
What are the drivers for sourcing relations?
Drivers of sourcing relations
› Specificity:
-how common the item is and, how many substitutes might be available; Blank DVD disks (low) vs. envelope with special design (high)
› Transaction costs:
-costs associated with making a purchase: ordering, selecting, billing, price setting, etc.
› Contract duration:
-length of the relationship
What are the types for the buyer-supplier relationships?
- Strategic alliance: Close relationship
- Spot purchase: No relationship, market based
- Request for proposal (RFP): Potential vendors prepare a detailed proposal on how they will meet requirements, price
- Reverse auction: Sellers compete to obtain business
- Request for bid (quotation) (Request for quotation is usually the initial step for an RFP): Specification is given and price is the main factor in selecting
- Vendor managed inventory: Suppliers manage an item for a customer
- Electronic catalog: Online purchasing
What is outsourcing and why it is necessary?
› What: the act of moving a firm’s internal activities and decision responsibility to outside providers
› Why: Allows a company to create a competitive advantage while reducing cost
› How: An entire function -e.g. distribution, manufacturing, services etc.
What are the reseasons for outsourcing?
› Organizational
Focus on core capability
Increase flexibility (outsourcing provides the ability to increase or reduce output in response to changes in demand)
› Financial
Selling assets, specifically low-return on assets
Access to new markets by locally producing
Lower costs (e.g. outsourcing to low-wage country)
Fixed costs become variable costs
› Improvement
Improve quality and productivity
Obtain expertise, skills, and technologies that are otherwise not obtainable
Improve image by being associated with reputed suppliers
What are the disadvantages of outsourcing?
Disadvantages of outsourcing › Loss of Managerial Control › Hidden Costs › Threat to Security and Confidentiality › Quality Problems › Tied to the Financial Well-Being of Another Company › Loss of Domestic Jobs
What is vertical integration and what are the differences compared to outsourcing?
-When a company controls more than one stage of the supply chain
Outsource Standard interfaces: • Information is highly codified and standardized including : prices, quantities, delivery schedules, etc. Very low requirement: • Large number of potential suppliers Strong protection: • Difficult-to-imitate technology • Distinct boundaries between different technologic components
Vertical integration
Non-standard interfaces:
• Manual adaption of data
• Much exchange of implicit knowledge and learning-by-doing
• Needed information is highly specific to the task
Very high with investments in specialized assets that are needed to optimize processes:
• Specialized facilities
• Investment in branded assets
• Proprietary activity with significant learning curve
• Long-term investments in specialized R&D programs
Unclear or weak intellectual property protection:
• Easy-to-imitate technology
• Complex and/or proprietary
What is green sourcing?
› Being environmentally responsible has become a business imperative
› Choose suppliers with green production technologies and environmentally friendly products
e.g. Many bottled water manufacturers have recently
worked with their suppliers to switch over to bottles
using much less plastic than before, reducing the amount of plastic that needs to be transported, recycled, and/or disposed of.
What is bullwhip effect and what are the 4 causes?
The variability in demand is magnified as we move from the customers to the producers in the supply chain.
Causes:
Demand forecast updating
- Order goods at certain times, e.g., first of the month, every Monday, etc. Then some periods of time with little orders while other periods of time with huge demands.
Order batching
- Retailers may be required to order in integer multiples of batch size, e.g., full truck load, etc.
Price fluctuation
- Price discount or promotion creates bigger variability of demand and demand lumpiness
Rationing and shortage gaming
- If product demand exceeds supply, a manufacturer may ration its products. Customers, in turn, may exaggerate their orders to counteract the rationing. Eventually, orders will disappear and cancellations pour in, making it impossible for the manufacturer to determine the real demand for its product
What are the possible strategies to mitigate the bullwhip effect?
- Vendor managed inventory
- “Everyday low price” instead of trade promotion
- Information sharing among supply chain partners
- Manufacturers rely on past sales records rather than on the amount requested in a particular order
Functional products vs Innovative Products (demand uncertainty)
Stable vs Evolving supply process (supply uncertainty)
Functional Products
› Goods that people buy in a wide range of retail
outlets:
Long product life cycle (more than two years)
Low margin (5 to 20 percent)
Little product variations - Stable demand: average forecast error of less than 10 percent
Innovative Products
› Products with a life cycle of just few months
• Demand is highly unpredictable
• Imitators quickly erode the competitive advantage
Stable • Low supply uncertainty • Mature manufacturing processes • Underlying technology is stable Evolving • High supply uncertainty • Underlying technology under early development and rapidly changing
Describe 4 types of supply chain strategies (with examples)
- Efficient supply chains: cost efficiency, e.g. groceries, basic apparel, oil and gas(low demand & supply uncertainty)
- Risk-hedging supply chains: share risks, e.g. hydroelectric power, food dependent on weather (low demand uncertainty, high supply uncertainty)
- Responsive supply chains: responsive and flexible by mass customization and make-to-order, e.g. e.g. fashion apparel, low-end computers. seasonal products ( high demand uncertainty, low supply uncertainty)
- Agile supply chains: responsive and flexible to customer needs, using pooled capacities and inventory, e.g. cell phones, high-end computers, semiconductors (high demand and supply uncertainty)
