Transcript 6-8 Structuring Supplier Relationships

Chapter 6
Sourcing
McGraw-Hill/Irwin
Operations Strategy
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
6-1
Sourcing Strategy Questions
 How many suppliers should the company
engage in total and for a given part or
commodity?
 What role should each supply play?
 Should overseas sourcing be used, and if so,
how much?
 How should supplier relationships be
structured and managed?
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Sourcing Strategy: What Can Be
Sourced
 Design of part of all of a product or service
 Manufacturing or delivery of a complete product or
service
 Manufacturing or delivery of some or all of the
components or modules of a product or service
 Extraction and processing of raw materials
 Processing equipment for both manufacturing and
services
 Logistics and supply chain services
 IT and other services
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Choosing the Right Number of Suppliers:
Value to Reducing the Supply Base
 Lower cost and effort to manage relationships
overall
 Greater potential to coordinate designs
 Increased capability to synchronize schedules
 Increased capability to evaluate suppliers on
multiple criteria, not just cost
 Capabilities of procuring modules rater than
parts
 Ease of tracking performance
 Ease of exchanging information
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Choosing the Right Number of Suppliers:
Disadvantages to Multi-tier Supply Chains
 Lack of visibility over inventory leading to:
 More stockouts as information is late to arrive
from lower levels of the supply chain
 More inventory throughout the supply chain as
each tier buffers against uncertainty
 Increased cost of quality
 Greater demand volatility
 Diminished new product or service
performance:
 Increased cycles times
 Less effective optimization of integral designs
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Choosing the Right Number of Suppliers:
Per Item Outsourced Depends On -
 Uniqueness of sourced item or equipment
 Viability and reliability of suppliers
 Stability of the technology associated with the
item being sourced
 Significance of the buying company’s
business to the total business of the supplier
 Branding implications of sourcing decision
 Competitiveness of market
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Choosing the Right Number of Suppliers:
Pros and Cons of Having Multiple-Suppliers
Adappted from Murther and Hayes
6-7
Structuring Supplier Relationships:
Roles of Suppliers
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Design
Procurement
Manufacture
Service delivery
Distribution
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Structuring Supplier Relationships:
Types of Supplier Relationships
6-9
Structuring Supplier Relationships:
Choosing the Right Type of Relationship
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Structuring Supplier Relationships:
Choosing the Right Type of Relationship
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Structuring Supplier Relationships: Contextual
Profiles for Different Relationships
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Structuring Supplier Relationships: Management
Profiles for Different Relationships
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Structuring Supplier Relationships:
Outsourcing Design
 Procure an existing design for a complete
product or service, component or module,
process, piece of equipment
 Engage a design supplier to make minor
revisions to an existing design
 Hire the design supplier to perform a specific
design activity
 Hire the design supplier to design against a
set of specifications
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Structuring Supplier Relationships:
Incentives and Contracts
 To improve flexibility
 e.g., minimum guarantees for certain volumes
 e.g., vendor managed inventories
 To optimize inventory and stockout trade-offs
 e.g., supplier allows returns
 e.g., revenue sharing
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Structuring Supplier Relationships:
Revenue Sharing Example
Video purchase price to the retailer: $45
Average rental income: $4.00
Marginal cost per video: $2.00
Average number of rentals per video: 35
Average revenue per video lifetime = 35 x
$4.00 = $140
 Purchase price under revenue sharing: $5
 Revenue sharing: 50%
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Structuring Supplier Relationships:
Revenue Sharing Example
 Without revenue sharing
 Co = $45
 Cu = $140 – 45 = $95
 Cu/(Co+Cu) = 95/140 = 67.9%
 With revenue sharing:
 Co = (35 x $2) - $5 = $65
 Cu = $5
 Cu/(Co+Cu) = $65/($65+5) = 92.9%
 Optimal solution:
 Cu = cost of underage = revenue less marginal cost =
$140 - $2.00 = $138.00
 Co = cost of overage = $2.00
 Cu/(Co+Cu) = 138/140 = 98.6%
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Structuring Supplier Relationships: Economics of
Revenue Sharing
Costs
Curve of lost sales or penalties plus inventory
Modified curve for returns
Optimum point with
Modified curve
x
x
Order of retailer
With no returns
x
Optimum point for manufacturer
Selling to customer
Inventory level
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Sourcing from Overseas
 Source offshore to:
 Access local markets
 Obtain needed technologies or skills
 Operate with lower factor costs
 Source locally in a developed country when
the company’s products or services
 Come in a wide variety
 Entail high transportation costs
 Are innovative or in the early stages of their life
cycles
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Managing Suppliers: Developing
Needed Information Sharing
 Co-locate highly interdependent stages of the
process
 Use vendor managed inventories to
concentrate information management at the
vendor
 Use incentives such as buybacks and revenue
sharing
 Use electronic communication and
coordination of schedules
 Streamline authoring for ordering
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Critical Success Factors in Supplier
Management: Procurement Organization
Maturity Model
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Critical Success Factors in Supplier
Management: Managing Risks
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Developing a Sourcing Strategy
 Determine the critical components, products or
services to be outsourced
 Identify which products or services should be
sourced overseas
 Determine number of suppliers
 Determine organizational relationships
 Determine levels of engagement and risk
management methods
 Establish contracts and incentives
 Establish the appropriate procurement management
structure
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