Transcript Chapter 6

Chapter 6
Sourcing
Copyright 2011 John Wiley & Sons, Inc.
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Lecture Outline
• What is Sourcing?
• The Sourcing Function
• Sourcing and SCM
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What is Sourcing?
Sourcing is the business function responsible
for all activities and processes required to
purchase goods and services from suppliers
– select suppliers
– negotiate contracts
– manage process of acquisition
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Related Terms
• Purchasing
– process of buying goods and services
– supplier selection, buying, negotiating contracts
• Strategic Sourcing
– seeks competitive advantage with sourcing
opportunities
– builds supplier relationships
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Evolution of the Sourcing Function
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Consumer vs. Commercial Sourcing
• Consumer
– many suppliers
– buyer is final customer
– small portion of supplier’s total
business
– little ability to negotiate
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Consumer vs. Commercial Sourcing
Continued
• Commercial
– larger volumes purchased
– very specialized purchasing needs
– number of suppliers may be limited
– large sums of money
– often imbalance of power
– buying contracts
– legal, ethical, environmental, security concerns
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Impact on the Organization
• Operational Impact
– right materials, right quantities, right place, right time
– optimal inventory balance
• Financial Impact
– sourcing spends 50% - 90% of revenue in most
manufacturing organizations
– large sums of money  can have huge savings
impact
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Impact on the Organization
Continued
• Strategic Impact
– support organization’s strategic direction
• Risk Mitigation
– minimize supply disruptions and protect reputation
– ensure suppliers meet performance standards
• Information Impact
– collect information on prices, suppliers, goods, new
products and technologies
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Sourcing Process
• Supplier Selection
– Existing vs. New Suppliers
– Request for Quotation (RFQ), Request for
Proposal (RFP), Request for Bid (RFB)
• Negotiate Contracts
• Manage Process of Acquisition
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Sourcing Process Continued
It is important for supplier management to be
directed through the sourcing function
– combine requests from different users for
same materials to lower costs
– seek input from other functions of
organization
– understand material requirements to meet
performance standards
– “Maverick buying”
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Cost vs. Price
• Cost
– sum of all costs incurred to produce the product
Total Cost = Fixed Costs + Variable Costs
– Fixed Costs
• do not vary with # units produced
• taxes, insurance, overhead
– Variable Costs
• vary directly with # units produced
• materials, labor
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Cost vs. Price Continued
• Price
– the amount at which the item is sold in the
marketplace
• Fair Price
– lowest price that can be paid while ensuring a
continuous supply of quality goods
• Total Cost of Ownership (TCO)
– purchase price plus all other costs associated
with acquiring the item
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Cost vs. Price Example
Variable Cost
Materials
$5,000
Labor
$2,000
+
Fixed Cost
Facility Overhead
Total Cost (not TCO)
$3,500
$10,500
+
Profit
$1,000
Selling Price
$11,500
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Bidding or Negotiation?
Sourcing function determines how to award
contracts
• Competitive Bidding
– awards business to the most qualified bidder
– most efficient for purchasing standard items
• Negotiation
– communication process between two parties
that attempts to reach a mutual agreement
– best when working with suppliers on factors
beyond the purchase
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Bidding or Negotiation?
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Demand Uncertainty
Supply chain demand uncertainty varies
depending on the type of product sourced
Two Categories of Products:
• Functional (low demand uncertainty)
• Innovative (high demand uncertainty)
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Functional Products
– satisfy basic functions or needs
– stable and predictable demand
– long life cycles
– supply chains are easy to manage
– low profit margins
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Innovative Products
– purchased for innovation or status
– highly unpredictable demand
– short life cycles
– supply chains are more difficult to manage
– higher profit margins
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Supply Uncertainty
Supply chain supply uncertainty can be
classified as:
• Stable (low supply uncertainty)
• Evolving Process (high supply uncertainty)
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Stable Supply Process
– low supply uncertainty
– mature manufacturing processes
– underlying technology is stable
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Evolving Supply Process
– high supply uncertainty
– manufacturing process in early stage
– underlying technology is quickly evolving
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Types of Supply Chains
• Efficiency-focused
– low demand and supply uncertainty
• Responsive
– innovative products with stable supply
base, mass customization
• Risk-hedging
– high supply uncertainty, high safety stocks,
resource pooling
• Agile
– high demand and supply uncertainty
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Multiple vs. Single Sourcing
• Multiple Sources of Supply
– traditionally considered best
– increases competition
– ensures supplier security
– arms-length relationship with buyer
– can result in variations between sources
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Multiple vs. Single Sourcing Continued
• Single Source of Supply
– becoming the norm
– focus on building close, long-term
relationship
– cooperative negotiation
– lower freight costs
– easier scheduling
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Global vs. Domestic Sourcing
• Global Sourcing
– also called “off-shoring”
– takes advantage of cheaper labor
– prominent with products with easily
defined standards
– higher fuel costs result in high
transportation costs
– virtual teaming can result in culture
clashes and misunderstandings
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Global vs. Domestic Sourcing
• Domestic Sourcing
– reduces transportation costs
– can monitor quality more closely
– closer buyer-supplier relationships
– the emphasis on sustainability and “green”
has resulted in a push toward local sourcing
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Outsourcing
Companies may outsource to:
– access technical skills
– lower costs
– free themselves of doing non-core activities
Two Key Dimensions:
• Scope
– degree of responsibility assigned to the supplier
• Criticality
– importance of the outsourced activities
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Dimensions of Outsourcing
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Electronic Auctions
Buyers can use Electronic Auctions (E-Auctions)
to select suppliers and determine aspects of the
purchase contract
Look at:
• Advantages and Disadvantages
• Types of E-Auctions
• Criteria for Use
• Three Stages of the E-Auction Process
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Advantages of E-Auctions
– simplified comparison of supply sources
– decreased error rate
– market transparency
– increased buying reach
– reduction in ordering cycle time
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Disadvantages of E-Auctions
– unrealistic low bidders seek to
renegotiate after contract is awarded
(may eliminate better suppliers)
– auction may include nonparticipants
seeking to gather market intelligence
– may interrupt an existing good supplier
relationship
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Types of E-Auctions
• Open Auction
– suppliers can select items to place offers on
– suppliers can see competitive offers
– suppliers can keep submitting offers until close
• Sealed Bid Auction
– sellers submit one blind bid
• Reverse Auction
– one buyer and many sellers
– most common type
– sellers place decreasing bids
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E-Auction Criteria
• E-Auctions should have:
– specifications for goods or services well
defined
– sufficient number of qualified suppliers
– clear understanding of market standards
– clear rules for running the E-Auction
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Three Stages of E-Auction Process
1. Preparation
– set product requirements
– identify and prequalify suppliers
– specify auction rules
– test and train participants on technology
2. The Auction Event
– communication between suppliers and seller
3. Follow-up
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Measuring Sourcing Performance
Inventory Turnover and Weeks-of-Supply are
two common performance measures of the
sourcing function
• Inventory Turnover
– measures how quickly inventory moves
Inventory Turnover =
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Cost of Goods Sold
Average Inventory Value
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Inventory Turnover Example
Jenco Inc. produces dolls. Annual cost of
goods sold is $8,000,000 and average
inventory is $2,000,000. What is the annual
inventory turnover?
Cost of Goods Sold
Inventory Turnover =
Average Inventory Value
$8,000,000
=
$2,000,000
= 4 inventory turns/year
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Measuring Sourcing Performance
Continued
• Weeks-of-Supply
– provides the length of time demand can be
met with on-hand inventory
Weeks of Supply =
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Average On-Hand Inventory
Average Weekly Usage
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Weeks of Supply Example
Jenco Inc. has an annual cost of goods sold of
$8,000,000 and average inventory is
$2,000,000. How many weeks of supply are
on-hand?
Weeks of Supply =
Average On-Hand Inventory
Average Weekly Usage
2,000,000
= $8,000,000/52
= 13 weeks of supply
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Review
1.
Sourcing is the business function responsible for all
activities and processes required to purchase goods and
services from suppliers.
2.
Terms such as “purchasing,” “strategic sourcing,” and
“supply management” are used interchangeably but are
not the same. Purchasing defines the process of buying
goods and services, whereas strategic sourcing, or
supply management, involve looking at sourcing from a
strategic and future oriented perspective.
3.
The sourcing function provides a number of critical roles
for the organization. These are operational impact,
financial impact, strategic impact, risk mitigation impact,
and information impact.
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Review Continued
4. The sourcing process involves every aspect of
acquiring goods and services, ranging from
identifying potential suppliers to negotiating and
awarding contracts, and ensuring contract
standards are met.
5. Competitive bidding and negotiation are two
different methods used to reach agreement and
develop contracts with suppliers.
6. Products can be classified as either primarily
functional or primarily innovative. Depending on
their classification, they will be sourced differently
and require different types of supply chains.
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Review Continued
7. Outsourcing engagements can be classified
based on scope and criticality of outsourced
tasks.
8. E-auctions are the use of Internet technology
to conduct auctions as a means of selecting
suppliers and determining aspects of the
purchase contract.
9. Inventory turnover and weeks of supply are
two metrics that can be used to measure
performance of the sourcing function.
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