session ix, x supply chain procurement

8/13/2019 Session IX, X Supply Chain Procurement

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Procurement Strategies Procurement as CA; Who are your

vendors? What to outsource?


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Supply Chain Network

1. Procurement- suppliers, outsourcing

- 2. Transformation- -Postponement- -Inventory decisions

- 3. Distribution- -types of supply chains- - channels


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Purchase StrategiesProduct Portfolio

1. Strategic products2. Buyer dominated

3. Supplier dominated4. Balanced5. Leveraged

6. Bottleneck7. Routine


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Strategic Products:

1. High volume2. Customer specifications3. High share of cost in the end product4. Cannot be changed in the short term5. Knowledge orientation- high technology6. Skills orientation- experience7.

Need development time for alternates8. Sensitive to the performance of the product(Examples: chips in electronic products, lubricants,stampings, forgings, cryogenics)


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Buyer dominated

1. Buyer dictates terms to suppliers2. Suppliers have got to meet the requirements of

quantity, quality, delivery as demanded by the buyer3. The relationship is one sided4. Suppliers business is sustained only as long as buyer

stays5. Suppliers expertise gets constrained by the buyer

Example: parts, components as demanded by car, fan,OEM manufacturers( appliances, white goods, soaps,detergents)


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Supplier dominated

1. Technology and expertise is with the supplier2. Supplier is a larger party3. Supplier insists on supply of both products and

services related to the product4. Supplier locks the buyer and buyer is left with no

choice5. Relationship of dependency between supplier and

customer is in hands of supplierExample: Computer manufacturers, battery forinverters, bearing manufacturers ,high qualityproducts, branded products Coke/Pepsi


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Balanced segment

1. No one dominates2. Each has its own strengths of technology or

specialization3. Both have mutual interest to keep relations4. Both benefit in business

Example: paint manufacturers, transporters, tyremanufacturers


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Procurement StrategiesBalanced segment

Periodic contracts 1. Spread out

2. Alliances on equal terms3. Open cost system4. Risk sharing

5. Benefit sharing6. VMI


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Bottleneck Products

1. Limited value in terms of money, but vulnerable inregard to supply or acceptable quality

2. Limited suppliers, often only one3. Supplier dominates in relationship4. Patented products5. Top quality that cannot be replicatedExamples: Greases, certain alloy steels, spares


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Procurement Strategies:Bottleneck products

Continuity (of supplies) Relationship1. Agreement to keep stock at supplier or at your

own even at additional cost2. Continuous search for alternate products or

designs3.

Contingency plans in case failure occurs4. Risk Management (in event of failure)5. Create safety stocks


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Routine Products

1. Few technical problems2. Low value few commercial problems3. Many alternate suppliers; brand not a necessity4. Small value5. More time is lost in administrative jobs to procure6. Do not require great attention or necessity to develop

relationship with a supplierExamples: Hardware, consumables, stationary, standard parts

available off the shelf in the market from many suppliers.


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Procurement Strategies:Routine products

Systems Contract Buying Relationship1. Enter into arrangement with a specialized purchasing office or

a trading house for entire purchase2. Draw up a buying contract settling all rates and demand

supplies when needed.3. Senior executives do not have to waste time once a contract is

arrived at4. Delegate responsibility to lower levels

-


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Bottleneck Items(Ensure supply, safetystocks)

Strategic Items(Form partnerships)

and alliances

Non Critical Items( Simplify and automate)

Leverage Items( Exploit purchasingpower and minimizecost)

Low High

Low

High

Profit Impact

SupplyRisk

Kraljics Supply Matrix


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Outsourcing Difference with purchase; Why, when and what to outsource?


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What is outsourcing?

Outsourcing is the entire set of businessprocesses required to purchase goods andservices.It includes selection of suppliers, design ofsupplier contracts, product designcollaboration, procurement of materials,and evaluation of supplier performanceOutsourcing organization divests itself ofits assets, infrastructure, people andcompetencies that it previously used


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A Comparison

Attribute Purchasing Outsourcing Term Short LongBase Multiple Single

Basis Price/Quality CapabilityOrders By purchase Over telephones ,

orders e-mails

Design Own Collaboration Tech. help as drawings as Information


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Risks in Outsourcing

Loss of competitive knowledge :Competitors come to know of your strengthsDependence on supplier :

Loss of motivation to innovate and to carry out valueanalysis and innovationsConflicting objectives :Supplier is interested to match his supply and demand(cost). Buyer on other side is interested in maximizinghis flexibility and service.

Wrong notions of cost and value addition are oftendeceptive and can lead to losses


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Strausmann refers reasons as:

LossesFaulty planning

Poor management controls in resource usePoor quality Wrong calculations of costs

Wrong choice of technologyLack of knowledgeHigh uncertainty of demand


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Performance Objectives andOutsourcing

Performance ObjectivesQuality

SpeedDependabilityFlexibility

Cost


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Impact on PO of Quality

In house manufacturing Outsourcing

Easy to trace source of poorquality

Quality can be poor

Longer time to trace thesources

Quality can be betterImmediate response to marketcomplaint

Less of motivation to marketcomplaint

Immediate steps onimprovement can be planned Needs talks and negotiations

Easy communication to in-house employees

Problems in communicatingpoor quality in face ofresistance


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Impact on PO of Speed

In house manufacturing OutsourcingFaster response tocustomer needs

Significant delays occur, assupplier tries to wait for

economic batch sizeFaster changes as controlsare within

Limited influence

Internal customers receivelow priority

external customerspredominate.

Throughput cycle,productivity are better

longer cycle to executebecause of higher batches


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Impact on PO of Dependability

In house manufacturing Outsourcing

Easier internal communicationhelps

Organizational barriers anddistance inhibit communication

Own controls help create aculture

Dependability based on cultureat supplier

Internal customers can suffer atexpense of external customers

Usually internal customers arelimited

Customers can influence for abetter performance

Customers do not know thealliance partner


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Impact on PO of FlexibilityIn house manufacturing OutsourcingQuick response to customers asthey are in contact

Customers are not in touch

Fast communication to in-houseemployees to implement achange

Communication takes time

Response is limited by scale and

scope of internal operations

Larger capacity at outsourcing

helps in larger flexibilityCustomers prefer direct contactand assurance

There can be problems ofconflicting needs of differentcustomers.


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Strategy on Outsourcing Toyota Mfg, System)

A company decides to outsource in twosituations:

1. Dependency on Capacity : A firm hasknowledge and skills, yet decides to go foroutsourcing for capacity reasons

2. Dependency on Knowledge : A firm does nothave people, skills and knowledge andtherefore out- sources.


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IV

( Option for

Outsourcing)

III( Very risky to

outsource)

I

(Go internal)

II

( Outsource)

Low High

Low

High

Knowl edge

Capacity

Dependency on Capacity & Knowledge

session ix, x supply chain procurement

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