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SCMCh06-StrategicSourcing.pptxSourcing Case – Boeing Dreamliner
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Boeing is an American aircraft manufacturer based in Chicago, IL
Sells primarily to Commercial Airlines, Military (US and Allies)
Main competition: Airbus (EU), Bombarier (CA), Embraer (BR)
Long development cycle and large contracts with long production lead times
Sourcing Case – Boeing Dreamliner
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Boeing used a new sourcing strategy for their Dreamliner project
Rationale for tiered supplier network
Reduce development costs ($10B to $6B)
Reduce development time (6yrs to 4yrs)
Spread financial risk
Supplier relationship management and control
2.3 million parts from hundreds of suppliers
Sub-contracting by Tier 1 suppliers to incapable Tier 2 suppliers
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
What Is Strategic Sourcing?
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Strategic sourcing can be defined as an institutional procurement process; “an approach to supply chain management that formalizes the way information is gathered and used so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace.”
“Strategic sourcing requires analysis of what an organization buys, from whom, at what price and at what volume.”
It differs from conventional purchasing because it places emphasis on the entire life-cycle of a product, not just its initial purchase price.
Sourcing - The process of identifying a company that provides a needed good or service.
Strategic Sourcing - A comprehensive approach for locating and sourcing key suppliers, which often includes the business process of analyzing the total-spend by material category.
Definition of Strategic Sourcing
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The focus is on development of long-term relationships with trading partners who can help the buyer meet profitability and customer satisfaction goals.
From an information technology perspective, strategic sourcing includes automation of:
Request for Quote (RFQ)
Request for Proposal (RFP)
Electronic Auctioning (e-auction or reverse auction)
Contract Management
Fundamentals of Supply Chain Management – McLaury/Spiegle
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Objectives of Strategic Sourcing
Objectives of strategic sourcing surround the reduction of cost while maintaining or improving quality:
Improve the value‐to‐price relationship (i.e. achieve cost reductions while maintaining or improving quality/service)
Understand category buying and management process, to identify improvement opportunities
Examine supplier relationships across the entire organization
Develop and implement multi‐year contracts with standardized terms and conditions across the organization
Leverage the entire organization’s spend
Share best practices across the organization
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Fundamentals of Supply Chain Management – McLaury/Spiegle
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Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Sourcing Strategies
Managing purchasing transactions in a strategic way.
Analysis and ability to make adjustments based on price, evaluation of supplier performance, and the overall needs of the organization.
High-level sourcing strategies include:
Insourcing: Producing goods or services using a company’s own internal resources.
Outsourcing: The traditional definition involves purchasing an item or service externally, which had been produced using a company’s own internal resources previously.
These decisions are not made solely by Procurement!
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Sourcing Strategies (continued)
Single-Source: A sourcing strategy where there are multiple potential suppliers available for a product or service, however, the company decides to purchase from only one supplier.
This is in contrast to a situation where there is only one supplier for an item, i.e., sole sourced. Sole source is not truly a strategy as there really isn’t a choice, and there is very little opportunity for a company to negotiate price or service.
Multi-Source: Purchasing a good or service from more than one supplier. Companies may use multi-sourcing to create competition between suppliers in order to achieve higher quality and lower price.
A regular review of an organization’s sourcing strategy is a must in order to achieve significant agreed upon results.
How Many Suppliers to Use
Reasons for a Single Supplier
To establish a good relationship
Less quality variability
Lower cost [100% of volume]
Transportation economies
Proprietary product or process
Volume too small to split
Reasons for Multiple Suppliers
Need more capacity
Spread risk of supply disruption
Create competition
More sources of information
Dealing with special kinds of business
Current trends favor using fewer sources.
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Fundamentals of Supply Chain Management – McLaury/Spiegle
CAUTION: Single-source is risky.
Successful sourcing strategies are almost always different for functional products versus innovative products.
Functional Products - MRO items and other commonly low profit margin items with relatively stable demands and high levels of competition i.e. office supplies, food staples, etc.
Potential Strategy: Reliable, low cost suppliers. Multi-sourced.
Innovative Products - characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition i.e. technology products such as the iPhone
Potential Strategy: Innovative, high-tech, cutting edge, market leading supplier. Long term partnership. Single-sourced.
Developing Successful Sourcing Strategies
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Classify the company’s products and suppliers as belonging to either the functional or innovative category.
Develop strategic sourcing goals and strategies for each category
Create the sourcing team (typically a cross-functional team led by Procurement)
Develop a team strategy and communication plan
Identify the targeted spend area(s) and conduct a spend analysis.
Gather information on supplier capabilities. Use Request for Information (RFI)
Develop a supplier portfolio (i.e., a profile of each supplier in each category)
Develop a future state (i.e., vision of what the company wants the future to look like)
Conduct supplier selection and negotiation
Implement Supplier Relationship Management (SRM) covered in the next chapter.
Framework for Sourcing Strategy Development
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Fundamentals of Supply Chain Management – McLaury/Spiegle
The five key areas of a typical spend analysis are:
Total historic expenditures and volumes
Future demand projections or budgets
Expenditures categorized by commodity and sub-commodity
Expenditures by division, department, or user
Expenditures by supplier
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Spend Analysis
Fundamentals of Supply Chain Management – McLaury/Spiegle
More detail on Spend Analysis in the book
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
| High Level Supply Risk | Bottleneck Items Maintain safety/strategic stock Develop contingency plans Strengthen relationships Search for alternatives | Strategic Items Ensure availability of supply Focus on relationship building Encourage process integration and innovation Frequent communications Establish mutually agreeable supplier performance criteria |
| Low Level Supply Risk | Non-Critical Items Simplify and streamline the purchasing process Reduce number of suppliers and simplify ordering Transfer buying responsibility to “users’ within the company | Leverage Items Consolidate volume as a negotiation tool Use competitive marketplace to reduce costs Automate supplier interfaces to minimize process related costs |
| Low Value to the Company | High Value to the Company |
Sourcing Strategies by Category
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RISK
VALUE
Kraljic
Matrix
Fundamentals of Supply Chain Management – McLaury/Spiegle
Sourcing Categories
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Non-Critical – routine items that involve a low percentage of the firms’ total spend and involve very little supply risk.
Bottleneck – unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers.
Leverage – commodity items where many alternatives of supply exist and supply risk is low. Spend is high and there are potential procurement savings.
Strategic – strategic items and services that involve a high level of expenditure and are vital to the firm’s success.
Fundamentals of Supply Chain Management – McLaury/Spiegle
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Supplier Base
Supply Base - The group of suppliers from which a company acquires goods and services.
Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.
Supply Base Rationalization (also known as, Supply Base Reduction, Supply Base Optimization). Reduction in the supply base to the lowest number of suppliers possible without increasing risk
Buyer-supplier partnerships are easier to manage with a rationalized supply base, and they can result in:
Reduced purchase prices
Fewer supplier management problems
Closer and more frequent interaction between buyer and supplier
Greater levels of quality and delivery reliability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Supplier Selection
Product and process technologies
Reliability
Quality
Order system and cycle time
Cost
Supplier Selection is typically conducted by a cross functional team.
The process of selecting suppliers is complex and should be based on multiple criteria using evaluation forms or scorecards.
The following are some commonly used criteria:
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Willingness to share information
Capacity
Service
Communication capability
Location
Fundamentals of Supply Chain Management – McLaury/Spiegle
as discussed in Chapter 5
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Strategic Alliance
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Fundamentals of Supply Chain Management – McLaury/Spiegle
A strategic alliance in sourcing, is an agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations.
Companies agree to share information and resources to achieve a mutual benefit.
Preferred suppliers are potentially ideal candidates for a strategic alliance.
The benefits of these types of arrangements include:
Potential to increase revenue and profits for both parties.
Potential to create a competitive advantage or block a competitor from gaining market share.
Mitigate risks and ensure a continuity of supply.
Position the partners for future strategic opportunities.
Strategic Alliance Development
Strategic Alliance Development - an extension of supplier development which refers to increasing a key or strategic supplier’s capabilities.
Results in better market penetration access to new technologies and knowledge, and higher return on investment
Eventually extends to a firm’s second-tier suppliers as the firm’s key suppliers begin to form their own alliances.
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Negotiating Win-Win Strategic Alliance Agreements
Distributive Negotiations: Refers to a process that leads to self-interested, one-sided outcome
Collaborative Negotiations: Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Successful collaborative negotiations start with a clearly expressed understanding of how each company wants to benefit from the collaboration.
Confirming the alignment between parties regarding motivation, contribution, financial benefit, and the management of the alliance are essential.
Consequently, negotiations are not about each company obtaining the most value, negotiations are more about establishing a relationship that works well for both parties.
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Strategic Alliance Scenario
Starbucks has just entered into a discussion with Amazon about partnering on in store services.
What would a strategic discussion look like?
Pain and Gain Share Agreements / Provisions
A supplier rewards and recognition program could also be reflected as part of the formal supply agreement in the form of pain and gain share provisions.
Agreements could be negotiated to spell out in detail the gains (reward) and pains (penalty) that the supplier will realize for either exceptional or poor performance.
Both parties would mutually agree on the provisions and the positive and negative outcomes.
Pain: Using a penalty or punishment is a negative outcome for poor performance, cost overruns, quality problems, etc.:
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Buyer could impose a financial penalty (i.e., fine) on the supplier for poor performance.
Buyer could reduce future business with the supplier for poor performance
Buyer could implement a bill-back amount equal to, or a percent of, the incremental costs resulting from poor performance.
Pain and Gain Share Agreements / Provisions
Gain: Using a reward as a positive outcome from exceptional performance:
Buyer could award a financial bonus to the supplier for exceptional performance
Buyer could award more business and/or longer contracts to the supplier
Buyer could share a portion of any cost reductions developed by the supplier which benefit the buyer.
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Buyer could provide access to in-house training seminars, conferences, tools and information, or other resources to the supplier.
Buyer could publically recognize the supplier and /or confer a special status on the supplier such as “Preferred Supplier”, “Partner”, “Supplier of the Year”, etc.
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Supplier Certification Programs
Will discuss in Chapter 7….
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Vendor Managed Inventory (VMI) - Suppliers directly manage buyer inventories to reduce the buyer’s inventory carrying costs and avoid stockouts for the buyer
A confirmed order is independently created by the supplier who is then responsible to deliver the item and bill the buyer for the materials delivered.
From the buyer-firm’s perspective:
Supplier tracks inventories
Determines delivery schedules and order quantities
Buyer can take ownership at the stocking location
Buyer may also be able to avoid taking ownership until the material is actually being used.
From the supplier’s perspective:
Avoids ill-advised customer orders
Supplier decides inventory set up and shipments
Opportunity for supplier to educate customers about other products
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Additional Sourcing Concepts – Vendor Managed Inventory
Co-Managed Inventory (CMI) is an arrangement where a specific quantity of an item is stored at the buyer’s location.
Once it is used, the item is replaced by the supplier, with the full knowledge and approval of the buyer.
In CMI, the buyer provides systems access to the supplier, and the supplier takes responsibility for managing the replenishment process in the buyer’s system accordingly.
The supplier reviews all of the available information and generates orders in the buyer’s system.
The primary difference between CMI and VMI is that in CMI the supplier is just recommending an order which is not confirmed until and unless the buyer approves it.
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Additional Sourcing Concepts – Co-Managed Inventory
The concept of Supplier Co-location is very similar to VMI and CMI, except that with Supplier Co-location a representative of the supplier is actually embedded in buyer’s purchasing department to forecast demand, monitor inventory and place orders.
The employee is on the payroll of the supplier but works for the buyer and is empowered to forecast demand, monitor inventory and place orders.
The arrangement involves the buyer granting the supplier access to potentially proprietary or sensitive data.
Supplier Co-location benefits both buyers and suppliers, from day-to-day operational improvement, to strategic advances in the structure of the supply chain organization.
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Additional Sourcing Concepts – Supplier Co-location
Discussion Outline
What is Strategic Sourcing, Drivers, and Objectives
Developing Successful Sourcing Strategies
Sourcing Categories
Supplier Base and Selection
Strategic Alliance Development
Supplier Certification
Additional Sourcing Concepts
Ethics and Sustainability
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Fundamentals of Supply Chain Management – McLaury/Spiegle
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Video Introduction
“Socially Responsible Supply Chain Management”
ASU Video Series (4 minutes)
Fundamentals of Supply Chain Management – McLaury/Spiegle
Most companies today have some type of Corporate Social Responsibility program. Frequently these programs also require suppliers to agree to abide by a Supplier Code of Conduct in order to be considered an approved supplier.
Some key terms and concepts related to ethics include:
Corporate Social Responsibility (CSR) is the practice of business ethics
Business Ethics is the application of ethical principles to business. The two (2) main ethical approaches are:
Utilitarianism: an ethical act is that which creates the greatest good for the greatest number of people, and should be the guiding principle of conduct.
Rights and Duties: some actions are just right in and of themselves, regardless of the consequences. Do the right thing!
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Business Ethics and Ethical Sourcing
Fundamentals of Supply Chain Management – McLaury/Spiegle
One example of utilitarianism in business is the practice of having tiered pricing for a product or service to different types of customers. For example, the airline industry offers first class, business class and economy class seats on many of their airplanes.
Customers who fly in first or business class pay a much higher rate than those in economy seats, but they also get more amenities. However, the higher prices paid for business or first class seats help to ease the airline’s financial burden created by making room for economy class seats. This would be an example of rule utilitarianism.
An example of act utilitarianism is a pharmaceutical company releasing a drug that has been governmentally approved with known side effects because the drug is able to help more people than are bothered by the minor side effects. Act utilitarianism often shows “the end justifies the means” mentality.
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Ethical Sourcing is that which attempts to take into account the public consequences of organizational buying, or to bring about positive social change through organizational buying behavior
This involves the Procurement organization ensuring that the products being sourced are acquired in a responsible and sustainable way.
The people involved in producing these products should be treated fairly and work in a safe environment.
The environmental and societal impacts must also be considered as part of the sourcing process.
More detail on developing ethical sourcing policies in your book
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Business Ethics and Ethical Sourcing
Fundamentals of Supply Chain Management – McLaury/Spiegle
One example of utilitarianism in business is the practice of having tiered pricing for a product or service to different types of customers. For example, the airline industry offers first class, business class and economy class seats on many of their airplanes.
Customers who fly in first or business class pay a much higher rate than those in economy seats, but they also get more amenities. However, the higher prices paid for business or first class seats help to ease the airline’s financial burden created by making room for economy class seats. This would be an example of rule utilitarianism.
An example of act utilitarianism is a pharmaceutical company releasing a drug that has been governmentally approved with known side effects because the drug is able to help more people than are bothered by the minor side effects. Act utilitarianism often shows “the end justifies the means” mentality.
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Sustainability is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, social, and environmental challenges.
In simple terms, do not mortgage the future for the present.
Companies must considering things like worker safety, wages, working conditions, human rights, etc.
Sustainable Sourcing
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Establishing a sustainable procurement process takes work and the company involved must understand the value of incorporating sustainable standards into their sourcing goals
Process and Resources
(1970’s – 1980’s)
Risk and Security
(1980’s – 1990’s)
Ethics and Sustainability
(2000’s – beyond)
Functions:
Procurement
Manufacturing
Logistics
(1950’s – 1970’s)
Evolution of Supply Chain Management Responsibilities
As the discipline of Supply Chain Management has been increasingly recognized for the value that it brings to an organization, supply chain professionals have been tasked with a larger role, and an evolving set of responsibilities over the years.
A significant concern in the Strategic Sourcing process
Evolving Responsibilities of Supply Chain Professionals
Fundamentals of Supply Chain Management – McLaury/Spiegle
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Back to Boeing
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Fundamentals of Supply Chain Management – McLaury/Spiegle
Do you think it is important for Boeing to have:
Supplier Segmentation and Spend Analysis?
Suppler Certification?
Ethical Sourcing?
Does Boeing have a winning sourcing strategy?
