ETHICAL AND SUSTAINABLE SOURCING Chapter 4 ETHICAL AND SUSTAINABLE SOURCING Prepared by Mark A. Jacobs, PhD ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives You should be able to – Understand and appreciate trends in ethical and sustainable sourcing Define and describe the terms fair trade, green purchasing, social sustainability, supply base rationalization, VMI, supplier co-location, and collaborative negotiations Describe how ethical and sustainable sourcing strategies are developed and implemented Understand the use of environmental supplier certifications ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES (Continued) You should be able to – Discuss the importance of developing strategic alliances Define benchmarking and discuss how it is used in strategic sourcing Understand the benefits of using 3PL suppliers 3 ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Outline Introduction Ethical and Sustainable Sourcing Developing Ethical and Sustainable Sourcing Strategies Supply Base Rationalization Programs Ethical and Sustainable Supplier Certification Programs Outsourcing Products & Services Early Supplier Involvement Strategic Alliance Development ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER OUTLINE (Continued) Use of e-Procurement Systems Rewarding Supplier Performance Benchmarking Successful Sourcing Practices Using Third-Party Supply Chain Management Services Assessing & Improving the Firm’s Sourcing Function 5 ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction Sourcing - all of firm’s activities used to manage external resources. Strategic sourcing - managing the firm’s external resources to support firm’s long term goals. Drivers of Strategic Sourcing Reduce costs & delivery cycle times Improve quality & long-term financial performance Increase number of global competitors Increase customer focus Reduce high costs of globalization & materials, Deliver more innovative products more frequently & cheaply than competitors

Ethical and Sustainable Sourcing Defined Business Ethics is the application of ethical principles to business Utilitarianism Rights and duties Corporate Social Responsibility is the practice of business ethics Ethical Sourcing is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior

Ethical and Sustainable Sourcing Defined (Continued) Ethical Policies should include – Determining where all purchased goods originated and the manner in which they were made Knowledge of the suppliers’ workplace principles Inclusion of ethics as a performance rating Independent verification of vendor compliance Report of supplier compliance to stakeholders Provision of detailed ethical sourcing expectations to suppliers

Sustainable Sourcing Green purchasing is aimed at ensuring products or materials meet environmental objectives e.g. waste reduction, reuse and recycling Sustainability is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challenges Considers worker safety, wages, working conditions, human rights

Sustainable Sourcing (Continued) Sustainable Sourcing should seek to – Grow revenues New sustainable product introduction Reduce costs Increase resource efficiencies Manage risk Link brand to social consciousness of consumer Build intangible assets Build social and environmental responsibility

Developing Ethical and Sustainable Sourcing Strategies Functional Products - MRO items & other commonly low profit margins with relatively stable demands & high levels of competition Innovative Products - characterized by short product life cycles, volatile demand, high profit margins, & relatively less competition

Developing Ethical and Sustainable Sourcing Strategies (Continued) Framework for ethical and sustainable sourcing strategy development – Step 1 – Establish corporate ethical and sustainable sourcing strategies Step 2 – Train purchasing staff and implement policies Step 3 – Prioritize items based upon ethical and sustainability opportunities and ease of implementation Step 4 – Develop performance measurement system Step 5 – Monitor progress and make improvements. Increase use of green and fair trade products Step 6 – Expand focus to include other departments

Developing Ethical and Sustainable Sourcing Strategies (Continued) Ethical and Sustainable Framework Step 1: Establish policies Step 2: Train and implement Step 3: Prioritize opportunities Step 4: Develop performance measurement systems Step 5: Monitor progress and make improvements Step 6: Expand focus to other departments

Supply Base Rationalization Programs Supply base rationalization (AKA supply base reduction or supply base optimization) is often the initial supply chain management effort Buyer-supplier partnerships are easier with a rationalized supply base & result in – Reduced purchase prices Fewer supplier management problems Closer & more frequent interaction between buyer & supplier Greater levels of quality & delivery reliability

Ethical and Sustainable Supplier Certification Programs Supplier certification programs are used to identify strategic supplier alliance candidates Firms use in-house formal certification programs, & most require ISO 9000 / 14000 or similar certifications as part of the certification process Buyers can monitor quality assurance methods & specify the type of acceptance sampling & statistical process control methods used

Outsourcing Products and Services Outsourcing allows a firm to – Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce management problems Improve manufacturing flexibility. Risks associated with outsourcing, include – Loss of control Production decisions & intellectual property Increased reliance on suppliers Increased need for supplier management

Outsourcing Products and Services (Continued) In-sourcing (backsourcing) – Reverting to in-house production when quality, delivery, and services do not meet expectations Co-sourcing (selective sourcing) – The sharing of a process or function between internal staff and an external provider & provides flexibility to decide what areas to outsource, when, and for how long.

Early Supplier Involvement Early supplier involvement (ESI) highly effective supply chain integrative techniques Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniques Value engineering activities help the firm to reduce cost, improve quality & reduce new product development time

Early Supplier Involvement (Continued) Vendor managed inventory (VMI) – Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer From the buyer-firm’s perspective – Supplier tracks inventories Determines delivery schedules and order quantities Buyer can take ownership at stocking location From the supplier’s perspective – Avoids ill-advised customer orders Supplier decides inventory set up & shipments Opportunity for supplier to educate customers about other products

Early Supplier Involvement (Continued) Supplier co-location Supplier’s employee is embedded in buyer’s purchasing department to forecast demand, monitor inventory & place orders with access to sensitive files & records Advantages Purchaser gets cost free employee Supplier gets security of future purchases Supplier learns quickly of design changes and new products Supplier learns of production problems and can work to resolve them

Strategic Alliance Development Alliance development, an extension of supplier development refers to increasing a key or strategic supplier’s capabilities.   Supplier alliances result in better market penetration access to new technologies & knowledge, & higher return on investment Alliance development eventually extends to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances.

Negotiating Win-Win Strategic Alliance Agreements Collaborative negotiations (aka integrative 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 Distributive negotiations – Refers to a process that leads to self-interested, one-sided outcome

Negotiating Win-Win Strategic Alliance Agreements (Continued) Steps Description 1. Build preparation process Gain an understanding of both parties’ interests; brainstorm value-maximizing solutions; identify objective criteria to evaluate fairness of agreement. 2. Develop negotiation database Review previous negotiations to catalogue standards, practices, precedents, metrics, creative solutions used, and lessons learned. 3. Design negotiation launch process Create an environment to work together to create a shared vocabulary, build working relationships, and map out a shared decision-making process. 4. Institute feedback mechanism Create process to provide feedback to negotiating teams and capture lessons learned. (Table 4.4)

Use of e-Procurement Systems Primary benefits of e-procurement include – Cost savings Frees-up time to concentrate on core business e-procurement systems – Concentrate large volumes of small purchases with a few suppliers, using e- catalogues, available to the organization’s users.

Rewarding Supplier Performance Rewarding suppliers provides an incentive to surpass performance goals Punishment is a negative reward, may be to reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality Strategic supplier agreements can reward suppliers by allowing – A share of the cost reductions More business and/or longer contracts Access to in-house training seminars & other resources Company & public recognition

Benchmarking Successful Sourcing Practices Measuring what other businesses do best and matching their performance is an effective approach to improving supply chain performance. Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal & informal. Resources for learning about & implementing sourcing practices – The Center for Advanced Purchasing Studies. Supply-Chain Council.

Using Third-Party Supply Chain Management Services Third-party logistics (3PL) A growing industry that involves managing a firm’s sourcing or materials &/or product distribution responsibilities 3PL providers charge a fee for services for an estimated savings of 10 to 20% of total logistics costs; benefits include improved service, quality, & profits for their clients. Lead logistics provider (LLP), aka 4PL – A primary 3PL provider; one that oversees other 3PL’s

Assessing & Improving the Firm’s own Sourcing Function The sourcing function is one of the most value-enhancing functions in any organization It is preferable to periodically monitor the purchasing function’s performance against set standards, goals, and/or industry benchmarks. Surveys or audits can be administered as self-assessments among purchasing staff as part of the annual evaluation process.

Assessing & Improving Firm’s Purchasing Function (Continued) Purchasing department assessment - Should include some of all of: Leading multifunctional teams Participation in value engineering Ability find and evaluate ethical and sustainable suppliers Optimization of supply base Managing and developing local, regional, and global suppliers Creating early supplier involvement initiatives Creation of strategic supplier alliances

Assessing & Improving Firm’s Purchasing Function (Continued) Purchasing department assessment - Should include some of all of: Integration of existing key suppliers Contributing to new product development Utilizing e-procurement Initiating cost reduction efforts Contribution to quality improvement Improvement in time to market Maintenance of internal cooperative relationships