Global Logistics Management Shihyu Chou National Taiwan Normal University 1 Unless noted, the course materials are licensed under Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Taiwan (CC BY-NC-SA 3.0) Attribution-NonCommercial-ShareAlike 3.0 Taiwan

2 Unit 3 Procurement and Outsourcing

 The prosperous development of international trade in recent decades and the emergence of globalization phenomenon have given rise to global outsourcing in both the manufacturing and service sectors.

4 Learning objectives  Define the procurement process  Explain factors affecting outsourcing and procurement decisions  Explain the need for outsourcing in view of both globalization and the growth of international trade  Identify the problems faced by outsourcing companies which can result in failure  Outline how outsourcees are selected and distinguish order winning and order qualifying criteria  Examine how outsourcer – outsourcee relationships develop Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p75)

Sourcing, purchasing and procurement

6 Definition of Related Terms  Procurement includes sourcing and purchasing and covers all of the activities from identifying potential suppliers through to delivery from supplier to the customer  Sourcing relates to identifying and working with appropriate suppliers  Purchasing relates to the specific functions associated with the actual buying of goods and services from such suppliers

Why Procurement Is So Important?  Procurement is a very important activity in manufacturing supply chains because purchased parts and materials account for more than 60% of the cost of finished goods.  For retail companies within the supply chain this percentage can be as high as 90%.  Procurement related factors that influence SCM: –Quality and costs of purchase items, on time delivery, supplier management, supplier relationships, etc. 7

8 The procurement process (I) 1.Preparing the specification (RFQ/RFT/RFI/RFP) –also including the quality, quantity and dates required –Issuing an RFQ/RFT/RFI/RFP which contains information regarding the product or services being requested. 2.Supplier selection –Capability, previous performance, price, service, relationship, flexibility, etc. –Potential suppliers have to first qualify by meeting certain criteria and/or performance expectations (order qualifiers) before they are given proper consideration. The criteria that allow the supplier to actually be selected are order winners.

9 The procurement process (II) 3.Placing the purchase order 4.Order management –Monitoring, tracking, and modifying when necessary 5.Receiving the purchases –Make sure received items conform to specification in terms of quality, quantity, and cost

 Multiple sourcing has the advantage that it brings in competition and back-up in case of problems of delivery associated with using a single source.  It is easier to engage in supplier development with one or few suppliers than it is to do so with many suppliers. 10

Growth in International Trade, Outsourcing and Offshoring

 Outsourcing –Transfer to a third party of the management and delivery of a process previously performed by the company itself –Handing process ownership over to a third party  Offshoring –Transfer of specific processes to lower cost locations in other countries –The company may still own and control the process itself in the lower cost location  The newly acquired outsource partner can also decide to offshore and transfer the newly acquired process to a lower cost location in another country

 China and India have become global centers for a large number of sectors such as manufacturing, software development, retailing and financial services.  In recent years there has been an unprecedented increase in companies outsourcing and/or offshoring processes from Europe to Asia.

 400companies out of the Fortune 500 have research base in China, while 125 have bases in India. (India Today, 21 August 2006)  Some companies failed because they couldn’t adapt to the factors such as infrastructure (energy, materials, transport and communication), education, training, local and national regulations, culture and organizational networks. 14

15 Why Firms do the Outsourcing?  Reduce direct and indirect costs  Reduce capital costs  Reduce taxes  Reduce logistics costs  Overcome tariff barriers  Provide better customer service  Spread foreign exchange risks  Share risk  Build alternative supply sources  Pre-empt potential competitors  Learn from local suppliers, foreign customers or competitors  Gain access to world class capabilities or attract talent globally Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p80)

16 Trends in the manufacturing sector emerging from globalization  Global markets  Global competition  Competitors, partners and customers from around the world  Global sourcing  Global presence  Global value chains resulting in increasing complexity and competition  Global access to knowledge and new technologies  High level of customer awareness and expectations  Rapid pace of technological change  Fast rate of product commoditization  SCM expertise and innovation are preconditions for business success Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p80)

Failures in Outsourcing

 Four out of five business process outsourcing (BPO) contracts signed today will need to be renegotiated within two years and that 20% of such contracts will collapse.  50% outsourcing relationships worldwide fail within 5 years  It is important to evaluate potential outsourcees before selection and agreement.  A good outsourcer-outsourcee relationship development strategy can help to overcome a number of factors causing failure in outsourcing.

 The following are frequently reported problems leading to failure in outsourcing, account for more than 50% among all reported problems : –Difference in culture, customer complaints, need for frequent reminders, mistakes, Late delivery  The remaining problems resulting in failures are: –Time difference, communication, general reliability, general responsiveness, commitment of supplier, cost realization competency, outsourcee being polite, confidentiality, quality consistency 19

Evaluating and Selecting Outsourcees 20

 The first step of the evaluation comprises ascertaining if the outsourcee meets the qualifier parameters determined for the process under consideration.  Order qualifiers: –Those criteria and/or performance expectations that a company must meet for a customer to even consider it as a possible supplier, for example, get certification under the ISO 9000 series 21

Some Common Order Qualifiers  Reliability of delivery on time  Quality certifications  Conformance to agreed specifications  Delivery lead time  Financial capability  Performance track record  Price or cost reduction  Senior management attitude  Responsiveness to demand uncertainty  Record of corporate social responsibility Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p83)

23 Outsourcing? yes no stop Process to be outsourced Potential outcourcee Are necessary conditions met? Evaluate outsourcees according to order qualifiers Is it a new outsourcing relationship? Level of difference in working environment Criticality of outsourced process Approach to manage:  outsourced operations  Nature of relationship  Contingency planning Cost of managing relationship and potential benefit derived from relationship Cost to benefit trade-off Evaluate outsourcees based on order winners Implement outsourcing arrangement A flow chart for evaluating outsourcees National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p83))

Outsourcer and Outsourcee Relationship Development

25 Four Stages 1.Master – Servant Stage  The outsourcer sets the expectations and the rules and the outsourcee delivers as per the stipulated norms  Low cost is the main concern 2.Consultative Stage  The outsourcer consults with the outsourcee on regular basis.  Other than cost, quality, reliability and responsiveness become important

26 Four Stages (II) 3.Peer to Peer Relationship Stage  Collaboration results in a more synergistic long-term relationship creating ‘win-win’ situation for both parties. 4.Competitive Stage  The outsourcee company takes the lead role and starts to compete with the outsourcing company in global markets

PageWork LicensingAuthor/Source 4 Define the procurement process…Examine how outsourcer – outsourcee relationships develop Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p75) 6 Procurement includes sourcing and purchasing and covers all of the activities from …delivery from supplier to the customer Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p76) 6 Sourcing relates to identifying and working with appropriate suppliers Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p76) 6 Purchasing relates to the specific functions associated with the actual buying of goods and services from such suppliers Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p76) Copyright Declaration 27

PageWork LicensingAuthor/Source 7 Procurement is a very important activity in manufacturing supply …60% of the cost of finished goods. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p76) 7 For retail companies within the supply chain this percentage can be as high as 90%. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p76) 8 Potential suppliers have to first qualify by meeting certain criteria and/or performance expectations (order qualifiers) before they …selected are order winners. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p77) 10 Multiple sourcing has the advantage that it brings in competition and back-up in case of problems of delivery associated with using a single source. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p78) Copyright Declaration 28

PageWork LicensingAuthor/Source 10 It is easier to engage in supplier development with one or few suppliers than it is to do so with many suppliers. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p78) 12 Transfer to a third party of the management and …the company itself Handing process ownership over to a third party Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p78-79) 12 Transfer of specific processes to …locations in other countries The company may still own and control the process …cost location Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p79) 12 The newly acquired outsource partner can also decide to offshore and transfer the newly acquired process to a lower cost location in another country Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p79) Copyright Declaration 29

PageWork LicensingAuthor/Source 13 China and India have become global centers for a large number of sectors such as manufacturing, software development, retailing and financial services. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p79) 13 In recent years there has been an unprecedented increase in companies outsourcing and/or offshoring processes from Europe to Asia. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p79) companies out of the Fortune 500 have research base in China, while 125 have bases in India. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p79) 14 factors such as infrastructure (energy, materials, transport and communication), …, culture and organizational networks Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p79) Copyright Declaration 30

PageWork LicensingAuthor/Source 15 Reduce direct and indirect costs… Gain access to world class capabilities or attract talent globally Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p80) 16 Global markets … SCM expertise and innovation are preconditions for business success Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p80) 18 Four out of five business process outsourcing (BPO) contracts signed today …years and that 20% of such contracts will collapse. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p81) 18 50% outsourcing relationships worldwide fail within 5 years Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p81) Copyright Declaration 31

32 Copyright Declaration PageWork LicensingAuthor/Source 18 It is important to evaluate potential outsourcees before selection and agreement. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p82) 18 A good outsourcer- outsourcee relationship development strategy can …factors causing failure in outsourcing. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p82) 21 The first step of the evaluation comprises ascertaining if the outsourcee meets …the process under consideration. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p82) 21 Order qualifiers: Those criteria and/or performance expectations that a company must meet for a customer to …for example, get certification under the ISO 9000 series Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p82) 22 Reliability of delivery on time… Record of corporate social responsibility Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p83)

33 PageWork LicensingAuthor/Source 23 National Taiwan Normal University Shihyu Chou (reference: Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p83)) 25 The outsourcer sets the expectations and the rules …delivers as per the stipulated norms Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p85) 25 The outsourcer consults with the outsourcee on regular basis. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p85) 26 Collaboration results in a more synergistic … ‘win- win’ situation for both parties. Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p85) 26 The outsourcee company takes the lead role and …company in global markets Mangan, J., Lalwani, C., and Butcher, T.,(2008), Global Logistics and Supply Chain Management, John Wiley & Sons, Ltd.(p85) Copyright Declaration