MGMT 524Global Strategic Sourcing

Class one

Welcome to Global Strategic Sourcing

Agenda for class one:Review of Syllabus & Course expectations

Global Sourcing & Planning defined

SCM Strategy & the Firm

Trends in sourcing

Readings: Smock et al.; Romano & Finley

Global Sourcing vs. Purchasing?

Old school purchasing / planning versus global sourcing

NPI-EOL and looping back again- embeddedness- emphasis on upstream- resource management- Global Production Network- Integration versus silos

Global sourcingDefinition:

Advantages: Global sourcing may lower unit costs, benchmarking current suppliers, accessing new markets, etc.

Disadvantages: much more complicated distribution and logistics, increasing handling costs, problems when dealing with different cultures, contractual problems, higher uncertainty about on-time delivery and quality, etc.

Proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations.

Proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations.

The present process – A “Senge like” system with balancing loops

- Establish expediting routine

- Expediting

- 'Trouble- shooting'

- Vendor rating- Vendor

- EstablishOrder routine

- Developorder routines

- Order handling

Order

Proc. Role

Elements

Documents

- Prepare contract

- Contractingexpertise

- Negotiatingexpertise

Contract

- Assure adequatesupplier selection

- Prequalification of suppliers

- Request forquotation

Supplier selectionproposal

Get specification

-

FunctionalspecificationTechnicalchanges Bring supplier

knowledge toengineering

-

-

-

-

-

FunctionalspecificationNorm/spec.control

DefineSpecification: NPI

Selectsupplier

Contractagreement

Ordering ExpeditingEvaluationFollow up

Overdue list

- Vendor performanceevaluation

- Settling contractproblems

EvaluationCLSC

- Vendor balanced score card- Vendor profile-Vendor ranking

Importance of Sourcing & Supply Management to the

FirmContinuity of SupplyAs % of Product ValueImpact on ProfitabilityCompetitive AdvantageNPI -> EOL -> CLSC

The role of sourcing in the value chain

inboundLogistics

JIT

Operations

Make vs. buy

outboundLogistics

Profit Center

marketing& salesE-procure& Forecast

Margin

Margin

SupportSupportactivitiesactivities

Primary activitiesPrimary activities

procurement / sourcing

technology development

firm infrastructure

human resource management

ServiceWarranty expense

Porter, 1985, p. 5.

Sourcing Example – Boeing 787

Importance of sourcing & purchasing to business(% of spend to total COGS) p. 13

60-85 60-80 50-70 60-80

25-50

512

18

3 12

50

Admin.

Services

Capex

Spares

Trade-items

Retailers Computers Consumer electronics

Automotive Pharma Service

industry

Typicalstructure

10-40 Production parts

Supply System Strategy

Key Activities of Sourcing:ContinuityLeast Total CostPlanning!

Three Flows of Supply Chain ManagementInformationMaterialsFunds

Manage in Both Directions

11

Strategic Planning

Accept the limitations of planningPlan for several possible outcomes60% of all strategic plans failPlanning at best is an imprecise art Plan to let cross-functional areas know what

they have to do to help us be successfulReady – Aim – Fire (not fire-ready aim)

Value

RiskCost

Purchasing cost reduction:• Supply base reduction• Product standardization• Global sourcing• Outsourcing and ‘offshoring’• Electronic auctions• Contractmanagement

Risk management:• Single vs multiple sourcing• Performance based contracting• Corporate Social Responsibility• Sustainable purchasing• Supplier auditing• Supplier Quality Assurance• Supplier financial position• Intellectual Property (IP) protection

Value improvement:• Revenue growth through new products• Improving customer value propositions• Early supplier involvement in NPD• Faster new product introduction• Co-branding and advertising

Changing purchasing agenda to sourcing

Professionalizing sourcingMajor principles of sourcing policies:Business alignment with sourcing goals

Develop a holistic sourcing strategyIntegrated, cross-functional approach

Sourcing decisions cannot be made in isolation, and should not be aimed at optimization of purchasing performance only

Performance drivenSCM engages in a healthy debate with its internal

customers

Strategy needs to consider the impact of globalization and pitfalls: The Goal: Maximize GM% early & Ethically

Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency. Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer. Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative. Integration between sourcing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury Setting up a SCM information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas. Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks.

Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency. Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer. Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative. Integration between sourcing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury Setting up a SCM information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas. Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks.

Examples of areas for action in sourcing

Sourcing management process

Implementation of sourcing policy:

Tools Aspects

Supply Policy Purchase order processing. Materials and supply planning

Product and supplier quality

Early involvement in developmentImproving suppliers’ quality performance - scorecard

Materials cost policyControl of materials cost and pricesReduction of materials cost and prices – transparent agreement

Supplier policy Sourcing policyImprovement of supplier performance - scorecard

Communication policyInternal contactsExternal contacts

Drivers of strategy developmentBusiness context

More competition, more mature technology used more pressure towards tactical purchasing when a sourcing strategy is required

Company strategyMore explicit about goals and objectives, more formalized

planning process greater chance sourcing is integrated in company strategy

System developmentInformation and communication technologies are important

enablers for modern sourcing strategy conceptsTop management commitmentFunctional leadership

Cost leadership and differentiation

1. Cost leadership main focus: continually reducing the cost price of the final product.

2. Differentiation aims at marketing products which are perceived by the customer as being unique

3. Focus strategy aims at serving a particular, clearly defined group of customers in an optimal way

Four basic supplier strategies

Partnership Competitive bidding Secure supply Category management and e-procurement solutions

Objective Create mutual

commitment in long term

relationship

Obtain ‘best deal’ for short

term

Secure short and long

term supply Reduce supply risk

Reduce logistic complexity Improve operational

efficiency Reduce number of

suppliers

Suitable for Strategic products (e.g. gearboxes, axles, engines)

Leverage products (e.g. commodities, steelplate, wire)

Bottleneck products (e.g.

natural flavors, vitamins,

pigments)

Routine products (e.g.

consumables, office

supplies)

Activities Accurate forecast of future

requirements Supply risk analysis Careful supplier selection ‘should cost’ analysis ‘rolling’ materials

schedules Effective change order

procedure Vendor rating

Improve product / market

knowledge Search for alternative

products / suppliers Reallocate purchasing

volumes over suppliers Optimize order quantities ‘target’ pricing

Accurate forecast of

future requirements Supply risk analysis Determine ranking in

supplier’s client list Develop preventative

measures (e.g. buffer

stock, consigned stock) Search for alternative

products / suppliers

Subcontract per product

group Standardize product

assortment Design effective internal

order delivery and invoicing

procedures Delegate order handling to

internal user

Decision level

Board level Cross functional approach

Board level Purchasing

Purchasing Cross functional

approach

Purchasing Cross functional approach

How Sourcing Decisions Impact How Sourcing Decisions Impact StrategyStrategy

Low-Cost Low-Cost StrategyStrategy

Response Response StrategyStrategy

Differentiation Differentiation StrategyStrategy

Supplier’s Supplier’s GoalGoal

Supply demand Supply demand at lowest at lowest possible cost possible cost (e.g., Taco Bell)(e.g., Taco Bell)

Respond quickly Respond quickly to changing to changing requirements requirements and demand to and demand to minimize minimize stockouts (e.g., stockouts (e.g., Dell Computers)Dell Computers)

Share market Share market research; research; jointly develop jointly develop products and products and options (e.g., options (e.g., Intel / Intel / Microsoft)Microsoft)

Primary Primary Selection Selection CriteriaCriteria

Select primarily Select primarily for costfor cost

Select primarily Select primarily for capacity, for capacity, speed, and speed, and flexibilityflexibility

Select primarily Select primarily for product for product development development skillsskills

How Sourcing Decisions Impact How Sourcing Decisions Impact StrategyStrategy

Low-Cost Low-Cost StrategyStrategy

Response Response StrategyStrategy

Differentiation Differentiation StrategyStrategy

Process Process Charact-Charact-eristicseristics

Maintain high Maintain high average average utilizationutilization

Invest in excess Invest in excess capacity and capacity and flexible flexible processesprocesses

Modular Modular processes that processes that lend lend themselves to themselves to mass mass customizationcustomization

Inventory Inventory Charact-Charact-eristicseristics

Minimize Minimize inventory inventory throughout the throughout the chain to hold chain to hold down costdown cost

Develop Develop responsive responsive system with system with buffer stocks buffer stocks positioned to positioned to ensure supplyensure supply

Minimize Minimize inventory in the inventory in the chain to avoid chain to avoid obsolescenceobsolescence

How Sourcing Decisions Impact How Sourcing Decisions Impact StrategyStrategy

Low-Cost Low-Cost StrategyStrategy

Response Response StrategyStrategy

Differentiation Differentiation StrategyStrategy

Lead-Time Lead-Time Charact-Charact-eristicseristics

Shorten lead Shorten lead time as long as time as long as it does not it does not increase costsincrease costs

Invest Invest aggressively to aggressively to reduce reduce production lead production lead timetime

Invest Invest aggressively to aggressively to reduce reduce development development lead timelead time

Product-Product-Design Design Charact-Charact-eristicseristics

Maximize Maximize performance performance and minimize and minimize costscosts

Use product Use product designs that designs that lead to low lead to low setup time and setup time and rapid rapid production production ramp-upramp-up

Use modular Use modular design to design to postpone postpone product product differentiation differentiation as long as as long as possiblepossible

Sourcing and examples of competitive strategies

Lean manufacturing:The Japanese way to manage supply base:

Average supply base is much smaller than for Western manufacturers.

Most Japanese OEMs have a ‘layered’ structure, which is often three or more tiers deep.

Suppliers are usually involved in new product development at a very early stage.

Suppliers are confronted with well-defined targets in terms of quality improvement, lead time reduction an cost reduction. They are informed as to whether they meet contractual obligations

Classification of sourced material (p. 15)COGS Oriented Sourcing:

■ Raw materials; materials which have undergone no transformation or a minimal transformation and which serve as the basis materials for a production process

■ Supplementary materials; materials that are not absorbed physically in the end product

■ Semi-manufactured products; products that have already been processed once or more times and that will be processed further at a later stage

■ Components; manufactured goods that will not undergo additional physical changes, but which will be incorporated in a system with which there is a functional relationship by joining it with other components

Classification of sourced material (p. 15)

Finished products; all products which are purchased to be sold, after negligible added value, either together with other finished products and/or manufactured goods

Non-Cogs Oriented Sourcing:

Investment goods or capital equipment; products that are not consumed immediately, but which purchasing value is depreciated over a period of time

Maintenance, repair and operating materials (MRO items); materials, which are necessary for keeping the organization running in general and for the support activities in particular

Services; labor intensive, non material activities that are executed by third parties on a contract basis

Changes in the Business Environment

Globalization of TradeDeregulation in many industriesProduct commonality across cultures and countriesFormation of trade blocks (NAFTA, EU)Improved transportationMore sophisticated information and communications

technology

Regulation of Banks and squeeze of credit markets

Outsourcing / Off-shoringBest-in-class Supplier Networks

A Supply Chain Strategy is Born

Co-ordination of Sourcing Requirements – Pooling of Purchases and StandardizationAcross DepartmentsAcross DivisionsAcross Countries

Integration of Purchasing, Inventory Management and Logistics – all into sourcing strategy

Integration of Purchasing and Engineering with Production Planning – all into sourcing strategy

What are the Supply Chain Priorities?

Make or BuyOutsourcingOffshoring

Reciprocity Agreements: Countertrade

Quality Management and Lean ManufacturingCycle Time Reduction

Environmental Issues – Sustainability & RegulationROHS / EnergyStar

Resulting Supply System Strategy

Four Emerging Trends: to be covered in future classesOutsourcingTechnology UtilizationSustainabilityRisk Management

Smock et al. Brains behind the strategyQuestions:1.How does technology play a role in the analysis of markets, strategy development, and managing suppliers?2.How does the ATK approach play a role in sourcing? How is it valid?3.How can supplier’s strategies affect your company? How can they help or hurt?4.Is balance of power important?

Utilize a structured procurement process

Initiated by GM in the 1980s

What is bought where? Who sells what? Where to buy what at “best value”Identify suitable suppliers NegotiateImplement Track results & restart (continuous cycle)

Specific example: A.T. Kearney seven step strategic sourcing process

Monitor the supply market

Profile the category

Select sourcing strategyGenerate supplier

portfolio

Select implementation path

Negotiate and select suppliersIntegrate suppliers

1

2

3

4

5

6

7

Step

Romano & Finley – Ann Taylor

Questions:1. What were the obstacles Ann Taylor’s new

procurement strategy? Why?2. Does Sourcing alignment mean loss of

creativity and innovation? How do you address this?

3. How important is senior leadership’s support in success of a sourcing strategy?

Scotts Miracle Gro Case

In-House, Outsource, or Off-Shore?

Scotts Case - AssignmentSee word document on questions to be

answered from handoutDefend your answers in detail in the write-upYour conclusion should be based on both

hard and soft data, all three options can be supported.

Discussions next week on outsourcing, but general make vs. buy strategy in the case.