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Sup

plyChainManagemen

t

(3rd

Edition

)

2

007PearsonEducation

13-1

Ch

apter14

SourcingDecisi

onsinaSupplyChain

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Outline

TheRoleofSourcinginaSupplyChain

SupplierScoring

andAssessm

ent

SupplierSelectio

nandContracts

2

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13-2

TheProcurementProcess

SourcingPlannin

gandAnalys

is

Ma

kingSourcingDecisionsin

Practice

SummaryofLea

rningObjectives

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TheRole

ofSourc

ing

inaSupplyChain

Sourc

ingisthesetofbusinessprocessesrequired

topur

chasegoodsa

ndservices

Sourc

ingprocesses

include:

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007PearsonEducation

13-3

Sup

plierselectiona

ndcontractnegotiation

Designcollaboratio

n

Pro

curement

Sou

rcingplanningandanalysis

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Benefits

ofEffective

SourcingDecisio

ns

Better

economiesofscalecanbeac

hievediforder

s

areaggregated

Moreefficientprocurementtransactionscan

significantlyreducetheoverallcost

ofpurchasing

Designcollaboration

canresultinproductsthatare

2

007PearsonEducation

13-4

easer

omanuacurean

srue

,resu

ngn

lower

overallcosts

Goodprocurementprocessescanfa

cilitate

coordinationwithsuppliers

Appro

priatesupplier

contractscanallowforthe

sharingofrisk

Firms

canachievealowerpurchase

priceby

increasingcompetitionthroughtheuseofauctions

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SupplierScorin

gandAs

sessmen

t

Supplierperformanc

eshouldbecomparedonth

e

basisofthesuppliersimpactontotalcost

Thereareseveraloth

erfactorsbes

idespurchase

price

thatinfluencetotalcost

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13-5

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SupplierAssessmentFactors

Replen

ishmentLeadT

ime

On-TimePerformance

Supply

Flexibility

DeliveryFrequency/

PricingTerms

InformationCoordination

Capability

DesignCollaboration

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007PearsonEducation

13-6

Minim

umLotSize

Supply

Quality

Inboun

dTransportationCost

apa

ty

ExchangeRates,Taxes,

Duties

Sup

plierViability

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SupplierSelec

tion-Auctionsand

Negotiations

Supplierselectioncan

beperformedth

roughcompetitive

bids,reverseauctions,

anddirectnegotiations

Supplierevaluationisbasedontotalcostofusinga

supplier

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007PearsonEducation

13-7

ucto

ns:

Sealed-bidfirst-priceauctions

Eng

lishauctions

Dutchauctions

Second-price(Vickery)auctions

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Co

ntractsan

dSupply

Chain

Performance

ContractsforProdu

ctAvailabilityandSupply

Chain

Profits

BuybackContracts

Revenue-SharinC

ontracts

2

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13-8

QuantityFlexibility

Contracts

ContractstoCoordinateSupplyC

hainCosts

ContractstoIncreaseAgentEffort

ContractstoInduce

Performance

Improvement

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ContractsforP

roductAvailability

an

dSupply

ChainP

rofits

Manyshortcomingsin

supplychainp

erformanceoc

cur

because

thebuyerand

supplierareseparateorganiza

tions

andeachtriestooptim

izeitsownpro

fit

Totalsu

pplychainprofitsmightthereforebelowerthanif

thesupp

lychaincoord

inatedactionstohaveacomm

on

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007PearsonEducation

13-9

o

ecv

eomaxmzn

goasuppy

canpro

s

RecallC

hapter10:dou

blemarginaliz

ationresultsin

suboptimalorderquantity

Anappr

oachtodealingwiththisprob

lemistodesig

na

contractthatencouragesabuyertopurchasemoreand

increase

thelevelofpr

oductavailability

Thesup

pliermustshar

einsomeofth

ebuyersdemand

uncertainty,however

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ContractsforProductAvailabilitya

nd

Supply

ChainPro

fits:Buyb

ackContr

acts

Allowsa

retailertoretu

rnunsoldinve

ntoryuptoa

specified

amountatanagreeduponprice

Increasestheoptimalorderquantityfortheretailer,

resulting

inhigherprod

uctavailability

andhigherprofits

forboth

theretailerand

thesupplier

2

007PearsonEducation

13-10

Mosteffectiveforprod

uctswithlowvariablecost,suchas

music,software,books,magazines,an

dnewspapers

Downsid

eisthatbuyba

ckcontractres

ultsinsurplus

inventorythatmustbedisposedof,w

hichincreasessupply

chaincosts

Canalso

increaseinformationdistortionthroughthe

supplychainbecauseth

esupplychain

reactstoretail

orders,n

otactualcustomerdemand

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Contract

sforProdu

ctAvailabilityandSu

pply

ChainProfits:Rev

enueShar

ingContracts

Thebuyerpaysamin

imalamount

foreachunit

purchas

edfromthesupplierbutsharesafraction

of

therevenueforeachunitsold

Decreasesthecoste

runitchared

totheretaile

r

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007PearsonEducation

13-11

whiche

ffectivelydec

reasesthecostofoverstock

ing

Canres

ultinsupplychaininformationdistortion

,

howeve

r,justasinth

ecaseofbuybackcontracts

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ContractsforProdu

ctAvailab

ilityandSupply

ChainProfits:Qua

ntityFlexibilityContracts

Allows

thebuyertom

odifytheord

er(withinlim

its)

asdemandvisibilityincreasesclosertothepointof

sale

Betterm

atchin

ofsu

landdem

and

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007PearsonEducation

13-12

Increasedoverallsup

plychainprofitsifthesupp

lier

hasflex

iblecapacity

Lowerlevelsofinfor

mationdistortionthaneithe

r

buybackcontractsor

revenuesharingcontracts

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ContractstoCoordinate

Supply

ChainCosts

Differencesincostsatthebuyeran

dsuppliercanlead

todecis

ionsthatincreasetotalsupplychaincosts

Example:Replenishm

entordersizeplacedbyth

e

buyer.

ThebuyersE

OQdoesnot

takeintoacco

unt

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13-13

.

Aquantitydiscountc

ontractmaye

ncouragethe

buyer

topurchasealargerq

uantity(whichwouldbelo

wer

costsfo

rthesupplier),whichwouldresultinlow

er

totalsupplychaincosts

Quantitydiscountsle

adtoinformationdistortion

because

oforderbatc

hing

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Contra

ctstoInc

reaseAg

entEffor

t

Therea

remanyinstancesinasupp

lychainwherean

agentactsonthebehalfofaprincipalandtheagents

actions

affecttherew

ardfortheprincipal

Exam

le:Acardealerwhosellsth

ecarsofa

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007PearsonEducation

13-14

manufa

cturer,aswellasthoseofothermanufacturers

Examplesofcontractstoincreaseagenteffortinclude

two-parttariffsandthresholdcontracts

Thresholdcontractsi

ncreaseinformationdistortion,

howeve

r

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Contra

ctstoInd

uce

P

erforman

ceImpro

vement

Abuyermaywantpe

rformanceim

provementfroma

supplierwhootherwisewouldhavelittleincentiveto

doso

Ashare

dsavinscon

tractrovides

thesu

lierwith

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007PearsonEducation

13-15

afractionofthesavingsthatresult

fromthe

perform

anceimprove

ment

Particularlyeffective

wherethebenefitfrom

improvementaccrues

primarilytothebuyer,but

wheretheeffortfortheimproveme

ntcomesprim

arily

fromthesupplier

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DesignC

ollaborat

ion

50-70p

ercentofspendingataman

ufactureris

through

procurement

80perc

entofthecostofapurchasedpartisfixedin

thedesignphase

2

007PearsonEducation

13-16

esgn

coaoraton

wtsupperscanresutn

reduced

cost,improvedquality,anddecreasedtimeto

market

Importanttoemploy

designforlog

istics,design

for

manufa

cturability

Manufa

cturersmustbecomeeffect

ivedesign

coordin

atorsthroughoutthesupply

chain

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Th

eProcurementProcess

Theproc

essinwhichthesuppliersends

productinrespo

nseto

ordersplacedbythebuy

er

Goalistoenableorderstobeplacedand

deliveredonsc

hedule

atthelowestpossibleov

erallcost

Twomaincategoriesofpurchasedgoods:

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007PearsonEducation

13-17

rectmateras:compon

entsuset

omae

nseg

oos

Indirectmaterials:goods

usedtosupportthe

operationsofafirm

Differencesbetweendirectandindirectmate

rialslistedinTable13.2

Focusfo

rdirectmaterialsshouldbeonimprovingcoord

ination

andvisib

ilitywithsupplier

Focusfo

rindirectmaterialsshouldbeon

decreasingthe

transactioncostforeach

order

Procurem

entforbothshouldconsolidate

orderswherepossible

totakeadvantageofeconomiesofscale

andquantitydis

counts

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Produ

ctCategorization

byValue

andCriticality(Figure14.2

)

CriticalItem

s

StrategicItems

High

ality

2

007PearsonEducation

13-18

GeneralItem

s

Bulk

Purchase

Items

Low

Low

High

Value/Cost

Criti

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Sourc

ingPlanningand

Analysis

Afirmshouldperiodicallyanalyze

itsprocurement

spendin

gandsupplierperformance

andusethis

analysisasaninputforfuturesourcingdecisions

Procure

mentspendin

gshouldbeanalyzedbypartand

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13-19

Supplie

rperformanceanalysisshouldbeusedto

build

aportfo

lioofsupplierswithcompl

ementarystrengths

Cheaperbutlowerpe

rformingsuppliersshouldbeus

edto

supplybasedemand

Higherperformingbutmoreexpensivesuppliersshouldbe

usedtobufferagainstvariationindemandandsupplyfrom

theothersource

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Making

Sourcing

DecisionsinPractice

Usem

ultifunctionteams

Ensur

eappropriate

coordinationacrossregions

andbusinessunits

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007PearsonEducation

13-20

Build

long-termrelationshipswithkeysuppliers

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Summ

aryofLe

arningO

bjectives

What

istheroleofsourcinginasupplychain?

What

dimensionsofsupplierperformanceaffect

totalc

ost?

2

007PearsonEducation

13-21

performanceandinformationdistortion?

What

aredifferentcategoriesofp

urchased

productsandservices?Whatisthedesiredfoc

us

forprocurementforeachofthese

categories?