426 W2 Discussion
CHAPTER 5
Sourcing Materials and Services
Supply Chain Management: A Logistics Perspective (10e)
Coyle, Langley, Novack, and Gibson
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May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Discussion Outline
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The role and nature of purchasing, procurement, and strategic sourcing
Strategic evolution of sourcing process
Types of purchasing activity and quadrant technique
Strategic sourcing process
Total landed cost concept
E-sourcing, e-procurement, and e-commerce
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Purchasing vs. Procurement vs. Strategic Sourcing
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Strategic Sourcing
Procurement
Purchasing
Managing procurement priorities such that they are well-aligned with goals and objectives of the supply chain and of the overall organization.
Managing a broad range of activities within the procurement process (e.g. supplier selection, price negotiation, contract management, supplier performance management).
Managing a firm’s acquisition procedures and standards, involving largely transactional activity of the buying of products & services.
Purchasing is an activity that follows conduct of a formal sourcing process, while procurement and strategic sourcing are best described as processes.
Consolidation and leveraging of purchasing power
Emphasis on value
More meaningful supplier relationships
Attention directed to process improvement
Enhanced teamwork and professionalism
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Unique Aspects of Strategic Sourcing
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Images courtesy of HRPeople
Strategic Evolution of Sourcing Process
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Source: Figure 5.2
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TRADITIONAL SOURCING
E-ENABLED PROCUREMENT
STRATEGIC SOURCING
INTEGRATED SOURCING/
SUPPLY CHAIN
Tactical sourcing
Functional purchasing
Limited, known supply base
Multiple quotes
Search for best price
E-sourcing
E-procurement
E-commerce
Supplier relationships
Expanded, non-traditional supply base
Total cost or Total Cost of Ownership
Sourcing a strategic supply chain process
Supply chain visibility of sourcing decisions
Seamless, integration of sourcing and supply chain activity
Three Types of Purchasing Activity
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Capital Goods
Maintenance, Repair,
Operations (MRO)
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Rebuy
Standard
Modifed
Types
of Buys
Types and Importance of Purchases – The Quadrant Technique
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Not all items /services purchased are of equal importance, requiring varying procurement strategies based on their value and risk.
Source: Figure 5.3
Distinctives
Engineered Items
Criticals
Unique Items
Items Critical to Final Product
Generics
Office Supplies
MRO Items
Commodities
Basic Production Items
Basic Packaging
Logistics Services
High Risk
Low Risk
Low Value or Profit Potential
High Value or Profit Potential
Strategic Sourcing
Core Principles & Process
Strategic Sourcing – Five Core Principles
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Assess total value
Emphasis beyond acquisition cost, evaluating total cost of ownership and the value of the supplier relationship.
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Individual spend categories need customized sourcing strategies.
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Requirements and specifications thoroughly assessed and rationalized as part of the sourcing process.
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Suppliers’ economics understood before identifying buying tactics (e.g. volume leveraging, price unbundling, price adjustment mechanisms).
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Strategic sourcing initiatives as subset of continuous improvement process for procurement and sourcing organizations.
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Develop individual sourcing strategies
Drive continuous improvement
Focus on supplier economics
Evaluate internal requirements
Strategic Sourcing Process
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Develop Strategic Plan
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Understand Spend
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Evaluate Supply Sources
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Finalize Sourcing Strategy
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Implement Sourcing Strategy
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Onboarding and Transitioning
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Collaborative Process Improvement
Strategic Sourcing Process Step 1: Develop Strategic Plan
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Create cross-functional planning committee
Identify key members of sourcing team
Agree on scope of sourcing processes
Images courtesy of MPA Exhibits
Strategic Sourcing Process Step 2: Understand Spend
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Refine understanding of sourcing needs of process-owners, with the nature of the requirement being represented by some type of measurable criteria
Images courtesy of Farol Consulting
Perform spend analysis to:
Understand spend by supplier, category, and internal user
Profile current sourcing approaches and areas for improvement
Address issues of make vs. buy
Strategic Sourcing Steps 3–5: Supplier Portfolio Screening
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Initial Supplier Research and Screening
(Market Analysis & Alternative Supplier Evaluation)
Request for Information (RFI)
Request for Proposal (RFP)
Supplier Site Visits
Supplier Selection
Source: Figure 5.6
Strategic Sourcing Steps 3–5: Supplier Portfolio Screening (continued)
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Source: Figure 5.7
Quality
Technical specifications
Design
Product life
Ease of repair
Maintenance
Dependability
Reliability
On-time delivery
Performance history
Warranty and replacement policies
Risk
Lead time risk and uncertainty
Potential for supply uncertainty
Cost risk
Capability
Production capability
Technical capability
Management
Information
Operating controls
Labor relations
Financial
Price of products
Financial stability
Desirable Qualities
Cultural compatibility and supplier attitude
Supplier locations
Packaging
Repair and return capabilities
Training aids
Sustainability
Commitment to sustainability
View sustainability as a potential driver of increased efficiency and effectiveness
Supplier Selection Criteria
Strategic Sourcing Process Step 6: Onboarding and Transitioning
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Finalize understandings and agreements with suppliers
Create management processes for new suppliers
Conduct transition and onboarding processes
Images courtesy of showd.me
Strategic Sourcing Process Step 7: Collaborative Process Improvement
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Regular feedback and communications
Analyze net savings and compare with goals and objectives
Process improvement for both suppliers and customers
Images courtesy of comindware
Total Landed Cost
Total Landed Cost (TLC)
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Source: Figure 5.8
Tangible,
Visible
Cost
Additional
Relevant
Costs
Purchase/ Acquisition Cost
Life-Cycle Costs
Inventory Costs
Other Logistics
Costs
Strategic Sourcing Costs
Quality Costs
Costs of
Disposition
Management Costs
Technology Costs
Cost Impacts on
Other Functional
Areas
Transaction Costs
TLC Example: Cost Comparisons of Alternative Sourcing Options
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| Destination Country – Switzerland | Country of Origin | ||
| Price Components – all prices in Euros | China | Vietnam | EU |
| Net purchasing price for a specific volume of the product from 3 different suppliers | 10,000 | 8,000 | 12,000 |
| Total transportation cost to Switzerland (Ocean freight from China/Vietnam – Road freight within Europe) | 4,000 | 6,000 | 1,200 |
| Customs according trade agreement | 1,000 | 1,500 | n.a. |
| VAT (Switzerland 7.6%) based on value of goods | 1,140 | 1,178 | 1,003 |
| Total Landed Cost | 16,140 | 16,678 | 14,203 |
Source: Figure 5.9
E-sourcing, E-procurement, and E-commerce
E-sourcing and E-procurement Functionality
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Online negotiations
Process automation
Collaboration tools
Management of RFI/RFP processes
Analytical tools
Project management
Logistics procurement
Contract management
Knowledge management
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Industry analysis and supplier identification
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Advantages and Concerns of Electronic Procurement
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Concerns
Advantages
Cyber-security
Lack of face-to-face contact between the buyer and seller
Technology-related concerns (lack of standard protocols, system reliability, time & money investment)
Lower operating costs (reduce paperwork & sourcing time, improve control over inventory & spending)
Improve procurement and sourcing efficiency (find new supply sources, improve communications, improve personnel use, lower cycle times)
Reduce procurement prices (improve comparison shopping, reduce overall prices paid)
Four Basic Types of E-commerce Business Models
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Images courtesy of UMeXX (United States Mexico Market Exchange)
Sell-side system: Online businesses selling to individual companies or consumers. Examples: Staples (www.staples.com), Wal-Mart (www.walmart.com), CNET (www.cnet.com)
Electronic marketplace: A seller-operated service that consists of a number of electronic catalogs from suppliers within a market (one-stop sourcing site for buyers). Examples: Expedia.com (www.expedia.com), Amazon (www.amazon.com), eBay (www.ebay.com)
Buy-side system: A buyer-controlled e-procurement or e-commerce service that is housed on the buyer’s system and is administered by the buyer. Example: Elemica (elemica.com)
Online trading community: A system maintained by a 3rd party technology supplier where multiple buyers & sellers in a given market can conduct business. Examples: Travelocity (www.travelocity.com), Priceline (www.priceline.com)
Summary
Different procurement and sourcing strategies devised based on the risk and value or profit potential from needed products/services that can be classified into: generics, commodities, distinctives, and criticals.
Strategic sourcing process includes: develop strategic plan, understand spend, evaluate supply sources, finalize sourcing strategy, implement sourcing strategy, transition and onboarding, and collaborative process improvement.
The concept of total landed cost is a highly-valuable element of the overall procurement process.
Advantages of e-sourcing and e-procurement include lower operating costs, improved efficiency, and reduced prices.
Four popular e-commerce model types are: sell-side, electronic marketplace, buy-side, and online trading community systems.