Sourcing Strategies

Benefits of Global OperationsReduce Direct and Indirect Costs Reduce Capital Cost Reduce TaxesReduce Logistics Costs Overcome Tariff BarriersProvide Better Customer Service Spread Foreign Exchange Risk Build Alternative Supply Sources Preempt Potential Competitors Learn from:Local Suppliers/Customers/Competitors/Foreign Research CentersAttract Talent GloballyTangibleIntangibleOffshoring OpportunitiesSource: Offshoring and Beyond, McKinsey Quarterly, 2003Changing Conditionsz Need to treat foreign facilities or activity centers as sources of competitive advantage {Trade pacts, reduction of tariffsz Lower need to set up foreign factories to overcome trade barriers{Increased manufacturing/service sophistication z Less emphasis on low wages{Pressure to create faster transfer of ideas from development to deliveryz Need for closer inter-functional relationshipsUpgrading the Strategic Rolez Focus on intangible benefits{e.g. learning from local suppliers, gaining experiencez Cultivate competencies{Improve the inside{Develop external resources {Take a global mandatez Create a robust network{Can absorb impacts of changes in the environmentz Plan for long-term commitmentPaths to Higher Strategic RolesTypes of Product or Service Factoriesz Offshore product or service factory{Minimum setup investments, low-cost production z Source product or service factory{Broader strategic role, greater local control z Server product or service factory{Set up to offset costs (taxes, duties) and risk (FOREX)z Contributor product or service factory{Separate functions (R&D), more responsibilities z Outpost product or service factory {Primary role: information collection z Lead product or service factory{Creates new processes, products, and technologiesSourcing Strategy Five Themesz Historical and Current Frameworks of Sourcingz Global Outsourcingz Supplier Relationshipsz Supplier Developmentz Advances in Sourcing –Practices and ToolsHistorical and Current Frameworks in SourcingTheme 1ProfitMargin InboundLogistics(rawmaterialshandlingandwarehous-ing)Operations(machining,assembling,testingOutboundLogistics(warehousinganddistributionof finishedproduct)PrimaryActivities Marketingand Sales(advertising,promotion,pricing,channelrelations)SupportActivitiesService(installationrepair,parts)Procurement(purchasing of raw materials, machines, supplies)Technology Development(R & D, product and process improvement)Human Resources Management(recruiting, training, development)Firm Infrastructure(general management, accounting, finance, strategic planning)PORTER’S MODELSource: Porter (1980)Disintegrated Supply ChainInformation, Product, Service and Financial Flows MATERIALS E N D C U S T O M E R SINTERNAL ENTERPRISEProcurementand Manufacturing Integration Distributionand Marketing IntegrationThe Great DivideSource: Global Benchmarking and Supply Chain Project -MSUInternal IntegrationInformation, Product, Service and Financial FlowsENDCUSTOMERS MATERIALSINTERNALENTERPRISESourcingOperationsLogisticsSource: Global Benchmarking and Supply Chain Project -MSUSUPPLIER NETW ORKINTEGRATED ENTERPRISEDISTRIBUTIVE NETW ORKInformation, Product, Service, Financial and Knowledge FlowsM A T E R I A L SRelationship ManagementE N D C U S T O M E R SEnterprise ExtensionSource: Global Benchmarking and Supply Chain Project -MSU Stages of Global Sourcing Evolution*IV-Fully Integrated Supply ChainsII -Moderate DevelopmentI -Basic BeginningsIII -Limited IntegrationQuality/cost teamsLonger -term contracts Volume leveraging Supply base consolidationAd hoc supplier alliances Cross-functionalsourcing teams International sourcingCross-location sourcing teamsGlobal sourcing Strategic supplier alliances Supplier development Total cost of ownershipParts/service standardization Early supplier involvementGlobal supply chains withexternal customer focusCross-enterprise decision making Full service suppliersEarly sourcing Insourcing/ outsourcing to maximize core competencies of firms throughout the supply chain* Adapted from Monczka et al (2000)Global Outsourcing PrinciplesTheme 2Factors affecting Global Outsourcing Decisionsz Comparative Advantage-low price contracts;z Hassles in manufacturing –If can not be madein-house outsourcez Decisions are made about individual partsrather than product familiesResult of wrong outsourcing strategyz Lost Focus-Companies are trying to catch upwith small manufacturers in cost and quality;z Companies are manufacturing commodityproducts to achieve economies of scale; and z Erosion in capability or core competency of thecompany.Reasons for wrong outsourcing decisionsz Lack of coordination between different functions,inconsistent priorities and lack of accountability;z Manufacturers fear long contracts/relationshipwould increase the bargaining power of suppliers;z Managers lack of focus. They suffer from “Do it allhere ”attitude;z Companies had no analytical tool todistinguishing core parts from commodities; and z Capacity & Labor issues-Capacity utilization andlabor efficiency.Outsourcing ModelBased on the following three main principles:z Focus on critical components and core competency;z Outsource components where suppliers have distinct competitive advantage; andz Use outsourcing to generate employee commitment and improve productivity.Supplier RelationshipsTheme 3Kieretsuz A complex network of Japanese firms which pursues sourcing (goods, services & finances) from within thenetworkz Characteristics of a typical kieretsu{Several large firms like a major bank, trading company, chemical firm, steel unit, automobile industry etc {Cross-holding, favoritism, long-term relationship & interlocking directorates Evolution of Kieretsuz Article compares the different approaches to Kieretsu by Matsushita, Hitachi and Toyotaz Additional article –HBR article on Chrysler’s experience with KieretsuInteresting updatesz The collapse of the powerful Mitsubishi Kieretsuz Nissan comes out of heavy losses and survival uncertainty when Carlos Ghosn takes charge and breaks the Kieretsumodel Supplier DevelopmentTheme 4Steps to Effective Supplier Developmentz Identify critical commoditiesz Identify critical suppliersz Form a cross-functional team (internally) z Meet with suppliers’top managementz Identify key projectsz Define details of projectsz Monitor status and modify strategies Pitfallsz Based on 200 companies with 83 actually responding in a variety of industries.z Pitfalls generally occur in the last 3 or 4 steps.z Three types of pitfalls{Supplier-specific{Buyer-specific{Buyer-supplier interfaceAdvances in Sourcing : Practices and ToolsTheme 5Key Sourcing Processes and Associative ToolsSupplierScoringAnd AssessmentSupplierSelectionAndContractNegotiationDesignCollaborationProcurementSourcingPlanningAndAnalysisSupplier ScorecardsTotal Cost of OwnershipTarget CostingValue Analysis/Value Engg.E-catalogsOnline market placesReverse auctionsSpend AnalysisSupplier RelationshipManagement (SRM)Sourcing Processesz Supplier Scoring and Assessment z Supplier Selection and Contractsz Design Collaborationz The Procurement Processz Sourcing Planning and Analysis The Role of Sourcingin a Supply Chainz Sourcing is the set of business processesrequired to purchase goods and servicesz Sourcing processes include:{Supplier scoring and assessment{Supplier selection and contractnegotiation{Design collaboration{Procurement{Sourcing planning and analysisBenefits of EffectiveSourcing Decisionsz Better economies of scale can be achieved if orders are aggregatedz More efficient procurement transactions cansignificantly reduce the overall cost of purchasing z Design collaboration can result in products that are easier to manufacture and distribute,resulting in lower overall costsz Good procurement processes can facilitatecoordination with suppliersz Appropriate supplier contracts can allow for the sharing of riskz Firms can achieve a lower purchase price by increasing competition through the use ofauctions Supplier Scoring and Assessmentz Supplier performance should be compared on the basis of the supplier’s impact on total costz There are several other factors besides purchase price that influence total costSupplier Assessment Factorsz Replenishment Lead Timez On-Time Performancez Supply Flexibilityz Delivery Frequency / Minimum Lot Sizez Supply Qualityz Inbound Transportation Cost z Pricing Termsz InformationCoordinationCapabilityz DesignCollaborationCapabilityz Exchange Rates,Taxes, Dutiesz Supplier ViabilitySupplier Scoring and Assessmentz Supplier Scorecard –Metalcraft{Used in the sourcing module of IBUS 736{Several local companies use this toolz Bosez Sonocoz Total Cost of Ownership –USC project –Class of 2003Supplier Selectionz Single vs. Multiple sourcing{Single sourcing facilitates asset sharing, relationshipbuilding and commitmentz Downside is highly risky{Multiple sourcing promotes competitionz Downside is promotes opportunism among suppliers {Example : Lopez era in GMz Scorecards{Raises the objectivity level of assessment{Promotes benchmarking{Dynamic/Real time assessment{Communication tool Supply Chain Contractsz Contracts to increase product availability {Incentives to stockz Contracts to coordinate supply chain costs {Forecasting/Planning (CPFR)z Contracts to induce performance improvement {Asset Specificity, Shared savings, Liberal credit terms Comment: Government agencies tend to be experts incontract definition and stipulation; (Example: USCsourcing projects)Design Collaborationz 50-70 percent of spending at a manufacturer is through procurementz 80 percent of the cost of a purchased part is fixed in the design phasez Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to marketz Important to employ design for logistics, design for manufacturabilityz Manufacturers must become effective design coordinators throughout the supply chainThe Procurement Processz The process in which the supplier sends product in response to orders placed by the buyer z Goal is to enable orders to be placed and delivered on schedule at the lowest possible overall costz Two main categories of purchased goods:{Direct materials: components used to make finished goods{Indirect materials: goods used to support the operations of a firm{Differences between direct and indirect materialsClassification of Purchased ItemsDirect Materials IndirectMaterialsUse Production Maintenance,repair, and supportoperationsAccounting Cost of Goods SoldSG&AImpact on Production Any delay will delay production Less directimpact Processing Cost Relative to Value of Transaction Low High Number of TransactionsLow HighSee RecentStudy onIndirectSpend byCAPS The Procurement Processz Focus for direct materials should be on improving coordination and visibility with supplierz Focus for indirect materials should be on decreasing the transaction cost for each orderz Procurement for both should consolidate orders where possible to take advantage of economies of scale and quantity discountsProduct Categorization by Value and CriticalityCritical ItemsStrategic ItemsGeneral ItemsBulk PurchaseItemsLowLowHighHighValue/CostC r i t i c a l i t ySourcing Planning and Analysisz A firm should periodically analyze its procurement spending and supplier performance and use this analysis as an input for future sourcing decisionsz Procurement spending should be analyzed by part and supplier to ensure appropriate economies of scalez Supplier performance analysis should be used to build a portfolio of suppliers with complementary strengths {Cheaper but lower performing suppliers should be used to supply base demand{Higher performing but more expensive suppliers should be used to buffer against variation in demand and supply from the other sourceSourcing Planning and Analysisz Aggregate the spendingz Build a supplier portfolioz Allocate demand to suppliersz Enabling tool: Supplier Relationship Management (SRM) modulez Example: Boeing’s use of SRM for parts commonality consolidation and sourcing Making SourcingDecisions in Practicez Use multifunction teamsz Ensure appropriate coordination across regions and business unitsz Always evaluate the total cost ofownershipz Build long-term relationships with keysuppliers。