Strategic and Global Sourcing

Question 1

What is the Kraljic matrix?

Answer 1

Created by Peter Kraljic in 1983, it maps supply items against two dimensions: Impact on business and complexity (risk) of supply market.

Question 2

How is it used to understand categories of spend?

Answer 2

Impact on business looks at: supply item effect on the bottom line (profit).
Complexity looks at: the likelihood of disruption in the supply chain.

Question 3

Typical issues with risk?

Answer 3

• supply availability
• dependance on supplier e.g. KFC
• safety and environmental reliability

Question 4

Typical issues with impact?

Answer 4

• product quality
• volume purchased
• impact on business growth

Question 5

What is a leverage item?

Answer 5

• Top left quadrant
• high prof, low risk
• buyer power
• suppliers easily replaced due to abundant supply
  e. g. Supermarket suppliers

Question 6

What are the strategies for leverage item?

Answer 6

1. Exploit position e.g. short term contracts/low prices

2. Create a strategic partnership e.g. collab and innovate.

Question 7

What is a strategic item?

Answer 7

• high supplier risk and high profit impact

- critical to the business

Question 8

What are strategies for strategic item?

Answer 8

1. ensuring an effective and predictable supplier relationship is key to the future of the buying company
2. terminate partnership e.g. if underperforming switch to global sourcing

Question 9

What is a non-critical item?

Answer 9

• low risk and have a low impact
• product standardisation
  e. g. office stationery, although important they do not have a significant impact upon the business, nor does their absence represent a serious threat.

Question 10

What are strategies for non-critical items?

Answer 10

1. Pooling through standardisation and bulk buying to lower costs e.g. travel
2. Efficiency though making them have specific requirements E.g. books

Question 11

What are bottleneck items?

Answer 11

• risk is high, but profitability is low
• supplier strength
• few suppliers that can behave oligopolistically to force prices upward.
• The supplier relationship is demanding, even though they have a limited impact upon company profitability. The market structure forces buyers to accept an unfavorable deal.

Question 12

What are strategies for bottleneck items?

Answer 12

1. Reduce dependence by broadening specifications, standardisation or supplier development
2. Secure supply through longer contracts and higher inventories.

Question 13

What does using matrix do?

Answer 13

Able to identify position on matrix and so can determine the most appropriate sourcing strategy.

e.g. Weak position compare to supplier - build market position. Strong position compared to supplier- exploit market position.

Question 14

What is multiple sourcing and when most appropriate to use?

Answer 14

The purchase of individual items used to create a product from different, multiple providers in order to keep production on track in the event of a failure to produce at one particular source.
e.g. Johnson & Johnson we partner with approximately 80,000 suppliers, organised into these 30 categories and then grouped into five families.

Most appropriate in competitive market, so when you are sourcing non-critical items.

Question 15

+/- of multiple sourcing?

Answer 15

Advantages

• If one fails to deliver you have other options, so there is less supply risk
• Lower price as large choice of suppliers (competitive tendering)
• Increased power of negotiation and maintains buyers bargaining power
• common in competitive markets because of low switching costs
• Maintains competition within supplier market
• Wide source of knowledge and expertise to tap into

Disadvantages

• Relationship not as strong and hard to encourage supplier commitment
• Difficult to develop effective Supplier Quality Assurance (SQA)
• High communication costs
• Supplier less likely to invest in new processes
• Lack of economies of scale
• Risk of collusion
• Increase transaction costs (all the costs of doing business e.g. monitoring costs)
• Little opportunity to use partnership sourcing

Question 16

What is single sourcing and when is most appropriate?

Answer 16

Practice of using one supply source without a competitive bidding process for a justifiable reason.

e.g. In 2013 a biopharmaceutical company Merck Serono made agreement with Quintiles to become their sole supplier of clinical trials services. To gain faster process innovation, a dramatically simplified supply chain and economies of scale in the notoriously expensive world of pharmaceutical R&D.

Most appropriate for bottleneck items, or strategic items, that are of high cost.

Question 17

+/- single sourcing?

Answer 17

Advantages

• Increased commitment by the supplier
• Firm only has to manage one buyer-supplier relationship of that component
• Economies of scale
• Allows the use of long term arrangements
• Opportunity to invest and share technological knowledge (R&D, process capability, JIT, E-procurement)
• Use of one source because of the high cost of the item

Disadvantages

• Consequences of failing greater as don’t have a backup, large supply risk
• Potentially less innovation
• The lock-in effect (unable to switch without substantial switching costs)
• Loss of buyer firm bargaining position

Question 18

What is delegated sourcing and when most appropriate to use?

Answer 18

It is a tiered approach where one supplier responsible for delivering an entire sub-assembly, as opposed to an individual part. That one supplier responsible for all suppliers. Buyer firm work closely with first tier.

e.g. Toyota use this and pass on responsibility to their first tier suppliers.

Most appropriate when sourcing leverage items, or strategic items.

Question 19

+/- delegated sourcing?

Answer 19

Advantages

• Reduction of 1st tier suppliers
• Reduced day to day costs
• Lower total costs
• Knowledge sharing

Disadvantages

• First tier suppliers can become very powerful
• Price increases
• Power dynamics

Question 20

What is parallel sourcing and when most appropriate to use?

Answer 20

Parallel sourcing was developed as a concept through game theory by Richardson (1993) to optimize supplies for the buyer. It occurs when a buyer has a single sourcing relationship for the components within a product group whilst having a multiple sourcing relationship across product groups.
Vertically along the supply chain it is sole sourcing, but horizontally within the supplier market it is dual sourcing

e.g. Solectron Corporation was a global electronics manufacturing company uses parallel, some of their customers were IBM and Cisco. got bought out by Flextronics.

Most appropriate when sourcing strategic items.

Question 21

+/- of parallel sourcing?

Answer 21

Advantages

• Can give the buyer firm the advantage of both multiple sourcing and single sourcing, but without the disadvantages of each (Hines, 1995)
• This allows the buyer to maintain competition across the model groups (i.e. between models 1 and 2).
• It also allows the firms to benchmark and compare the performance between the models and the associated suppliers
• Helps to maintain competition within the supplier market

Disadvantages
- This is a complex supply chain structure to manage.

Question 22

What is outsourcing?

Answer 22

Outside the boundary of your firm.

e.g. Domestic outsourcing (reshoring) - Outsourced to local/national suppliers e.g. Apple are bringing manufacturing back into the US, bringing value of over 35 billion to US. They have also been giving tax cuts.

Question 23

What is offshoring?

Answer 23

Offshoring means outside the country.

e.g Offshore outsourcing - Neilson completed a 2.5 billion deal to outsource their IT to TATA.

Question 24

Types of global sourcing?

Answer 24

1. Domestic insourcing
2. Domestic outsourcing
3. Offshore outsourcing
4. Captive model

Question 25

What is domestic insourcing?

Answer 25

Insourcing is the commencement of performing a business function that could be contracted out internally: either with the help of a third-party provider who performs the task on-site, or by conducting said task independently

e.g. Sainsbury’s - new CEO decided to go with automated warehouses and leave it all the IT operations to Accenture instead of going down the loyalty card route like Tesco. They dropped out the big four and didn’t even have enough stock over the Christmas period. Bad decision to go with domestic insourcing.

Question 26

What is captive model?

Answer 26

To create its presence in the lower cost location and conduct work there as a part of its own operations. The activities are performed remotely, but they are not outsourced to the vendor.

e.g. CITI bank moved their procurement offices to Hungary, they got language skills and cost efficiencies. Everyone in Hungary speaks minimum 4 languages.