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Strategic Sourcing Decisions:

Introduction

Luis A. Moncayo Martınez

Diploma in Operations Planning and Management

Instituto Tecnologico Autonomo de Mexico

c©Luis Moncayo (ITAM) Strategic Sourcing Decisions 1 / 44

Table of contents

1 Supply chain management and logisticsComponents of a logistic systemDecision making in logisticsLogistic strategy’s Objectives

2 Process ModellingValue chain framework of M. PorterSupply-Chain Operations Reference-modelPlanning triangle

3 Drivers of SC performance

4 Metrics

5 Importance of Supply Chain

6 Concept of Logistics


Why is Supply Chain Management (SCM) important?

In the 1980’s new strategies that allowed companies to reduce cost andbetter compete in different markets appeared. Strategies such asjust-in-time manufacturing, kanban, lean manufacturing, total qualitymanagement, and others became popular. Corporations invested anenormous amount of resources in implement them.

However, in the last few years many corporations have realised than anefficient and integrated SC is the next step forward in order to minimisecost and products’ lead time.


Why is Supply Chain Management (SCM) important?

Two examples

Dell Computers applies a strategy called Virtual “Integration” inwhich the SC is integrated with its suppliers by means of informationtechnologies that enable it to reduce the computer’ lead time to onlyfive days and get revenues of US$12 billions in thirteen years

Procter & Gamble reported it saved its retailers customers US$65millions in an eighteen-month SC initiative in which the manufacturesand suppliers work closely


Concept

According to Simchi-Levi et al. (2003)

SC Management (SCM) is a set of approaches utilised to efficientlyintegrate suppliers, manufacturers, warehouses, and stores, so thatmerchandise is produced and distributed at the right quantity, to the rightlocation, and at the right time, in order to minimise system wide costswhile satisfying service level requirements


Concept (Cont.)

According to the Council of Logistics Management:

The process of planning, implementing, and controlling the efficient, costeffective flow and storage of raw materials, in-process inventory, finishedgoods, and related information from point-of-origin topoint-of-consumption for the purpose of conforming to customerrequirements.


Concept (Cont.)

Other names includes:

Business logistics management

Logistics management

Material management

Distribution, planning and controlling


Concept (Cont.)

Supply chain or Logistics management

- is a discipline that links the Market Place, Procurement Activities, andManufacturing Facilities in a network,

- a set of approaches utilised to efficiently integrate suppliers,manufacturers, warehouses, and stores so the merchandise is producedand distributed in the right quantities, to the right locations, and atthe right time.


Components - Management

There are six key elements to a supply chain:

1 Production

2 Supply

3 Inventory

4 Location

5 Transportation

6 Information

Three flows:

1 From supplier to customers a dominant flow of finished products andservices

2 Backwards dominate flow of both demand and design information aswell as reverse logistics

3 Backwards and forwards any piece of information (financial, inventory,etc.)


Components - Network


Supply Chain processes


Difficulties in SC processes

Multiple business functions are impacted

There are trade-offs among conflicts objectives

There are business issues unique to each logistic systems

Quantitative analysis is essential for intelligent decisions


Difficulties in SC processes (Cont.)

It is challenging to design and operate a SC so that total systemwidecosts are minimised, and system wide service level are maintained

Uncertainty is inherent in every SC; customer demand can never beforecast exactly, travel times will never be certain, and machines andvehicles will break down


Objectives

To get the most profit, a company must have at least four main objectives:Provide:

1 Provide best customer service

2 lowest production costs

3 lowest inventory investment

4 lowest distribution costs


Objectives (Cont.)

Aims:1 Minimise systemwide costs (inventory, transportation, raw material,

manufacturing, order fulfilment, ...)

2 Satisfy service level (time, availability, ...)


Process Modelling

When analysing SC, the modelling process is an important firstcornerstone. In this context several questions arise.

Which process are important for the SC?

How can these processes be modelled?


Process Modelling (Cont.)

To answer the first question, the Global Supply Chain Forum identifieseight core SC process

1 Customer relationship management

2 Customer service management

3 Demand management

4 Order fulfilment

5 Manufacturing flow management

6 Supplier relationship management (procurement)

7 Product development and commercialization

8 Return management (return)


Process Views of a SC (Chopra & Meindl, 2010)

Procurement Cycle

Manufacturing Cycle

Replenishment Cycle

Customer Order Cycle

Suppliers

Manufacturer

Distributor

Retailer

Customer


Value chain framework of M. Porter

SC management’s process orientation has been stressed before and sincePorter’s introduction of the value chain paradigm has been developed ineconomics. This process oriented management leads to superior resultscompared to the traditional focus on functions.


Value chain framework of M. Porter (Cont.)

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Opera

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Out

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Mark

eting a

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Sale

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ice

Infrastructure

Human Resource Management

Technology Development

Procurement

Primary Activities

Sup

port

Act

iviti

es


Value chain framework of M. Porter (Cont.)

Organisations

Value Chain

Supplier

Value Chains

Channel

Value Chains

Customer

Value Chains


What is a process reference model?

Capture the "as-is" stateof a process and derivethe desire "to-be" futurestate

Quantify the operationalperformance of similarcompanies ans establishinternal targets based on"best-in-class" results

Characterise the manage-ment practises and softwaresolutions that results in"best-in-class" performa-nce

BUSINESS PROCESS

RE-ENGINEERING

BENCHMARKING BEST PRACTISES

ANALYSIS

"as-is" state for desire "to-be"

future state

PROCESS REFERENCE

MODEL

Quantify operation performanceand establish "best-in.class"

results

Characterise the managementpractises and software sol.


SCOR-Model

It consists of a system of process definitions that are used to standardiseprocesses relevant for SCM. The standard processes are divided into fourhierarchical levels:

1 Process type

2 Process categories

3 Process elements

4 Implantation


SCOR-Model (Cont.)

Level 1 - Process Types


SCOR-Model (Cont.)

Level 2 - Process Categories


SCOR-Model (Cont.)

Level 3 - Process Elements

P1.1

P1.2

P1.3 P1.4

Identify, prioritise,

and aggregate

supply chain

requirements

Identify, assess, and

aggregate supply

chain resources

Balance supply chain

resources with supply

chain requirements

Establish and

communicate

supply chain plans

Supply chain plans

(P2.1, P3.1, P4.1) (Customer)

(P2.4) Sourcing plans (EP.5, EP.6) Projected internal and external production capacity

(P3.4) Product make plans (EP.5, EP.6) Revised capital plan

(P4.4) Delivery plans (EP.5, EP.6) Outsource plan

(EP.3) Planning data (EP.8) Regulatory requirements

(Customer) Customer requirements

(D1.3, D1.10) Order backlog, shipments

(EP.3) Planning data

(EP.9) Revised aggregate forecast and projections, revised business assumptions

(EP.1) Planning decision policies

(EP.2) Supply chain performance improvement plan

(EP.4) Inventory strategy


The Planning triangle, (Ballou, 2004)


Framework for structuring drivers


Responsiveness spectrum


1. Facilities

Capacity

Utilization

Theoretical flow/cycle time of production

Actual average flow/cycle time

Flow time efficiency

Product variety

Volume contribution of top 20% SKUs and customers

Processing/setup/down/idle time

Average production batch size

Production service level

Example: Toyota and Honda


2. Inventory

Average inventory

Products with more that a specified number of days of inventory

Average replenishment batch size

Average safety inventory

Seasonal inventory

Fill rate

Fraction time out of stock

Example: Nordstrom (US retailer)


3. Transportation

Average inbound transportation cost

Average inbound transportation cost per shipment

Average outbound transportation cost

Average outbound shipment size

Average outbound transportation cost per shipment

Fraction transported by mode

Example: Laura Ashley sells clothing and other household item through amail-order catalogue


4. Information

Forecast horizon

Frequency of update

Forecast error

Seasonal factor

Variance from plan

Example: Dell computers


5. Sourcing

Days payable outstanding

Average purchase price

Range of purchase price

Average purchase quantity

Fraction on-time deliveries

Supply lead time

Example: Cisco


6. Pricing

Profit margin

Days sales outstanding

Average sale price

Average order size

Range of sale price

Range of period sale

Example: Amazon


Why SC management is important?

Supply and distribution lines are lengthening

Costs are significant

Logistics is important to strategy

Logistics add significant customer value which is understood as: form,time, place, and position

Customers increasingly want quick customised response


Why SC management is important? (Cont.)


Making-decision levels

The key issues in SCM span a large spectrum of a firm’s activities, fromstrategic through the tactical to the operational levels.

Strategic level deals with decisions that have a long-lasting effect onthe firm

Tactical level includes decisions that are typically updated anywherebetween once every quarter and once every year

Operational level refers to day-to-day decisions


Making-decision levels


Concept of Logistics


Concept of Logistics

What is Logistics?

Part of the supply chain process that plans, implements, and controlsthe efficient, effective forward and reverse flow and storage of goods,services, and related information between the point of origin and the pointof consumption in order to meet customers’ requirements


Concept of Logistics (Cont.)

LOGISTICS

Flow of Materials Storage


Importance of Logistics)

Logistics is about creating value

Products and services have no value unless there are in possession of thecustomer:

1 when (time) and

2 where (place)

they wish to consume them. Values is added when customers are willing topay more for a product or service than the cost to place it in their hands.


Importance of Logistics (Cont.)


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