CHAPTER 4- STRATEGIC SOURCING FOR SUCCESFUL SUPPLY CHAIN MANAGEMENT Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

© 2005 Thomson Business and Professional Publishing Learning Objectives You should be able to: Describe how strategic sourcing plans are developed & implemented. Describe the various strategic sourcing activities. Describe purchasing’s role in managing key supplier relationships. Describe performance criteria used to assess suppliers. Describe how strategic supplier relationships impact the firm. Describe how a reverse auction works. Understand the importance of sharing benefits of strategic partnerships. Understand the strategic role played by the purchasing function in developing and improving the supply chain. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Chapter Four Outline Developing Successful Sourcing Strategies Supply Base Reduction Programs Evaluating & Selecting Key Suppliers Strategic Alliance & Supplier Certification Programs Outsourcing Programs Early Supplier Involvement Supplier Management & Alliance Managing & Developing 2nd-Tier Supplier Relationships Use of e-Procurement Systems Rewarding Supplier Performance Benchmarking Successful sourcing Practices Using Third-Party Supply Chain Management Services Assessing & Improving Firm’s Purchasing Function Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Introduction Drivers of Strategic Sourcing Reduce costs and delivery cycle times Improve quality and long-term financial performance Increase number of global competitors Increase customer focus Reduce high costs of globalization and materials, Deliver more innovative products more frequently & cheaply than competitors Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Developing Successful Sourcing Strategies Successful Sourcing Strategies are different for functional products and for innovative products. Functional Products are MRO items and other commonly low profit margins with relatively stable demands and high levels of competition. Innovative Products are characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Developing Successful Sourcing Strategies- Cont. The following is a framework for supply chain strategy development: Step 1 The firm’s suppliers are classified as belonging either to the innovative or functional category. Step 2 The goals and strategies of the inbound portion of the supply chain are developed. Step 3 Supply chain capabilities are evaluated & compared to required performance. Step 4 Set goals for improving capabilities. Step 5 Implement work plan. Step 6 Monitor progress & adjust the work plans. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Developing Successful Sourcing Strategies- Cont. Supply Chain Sourcing Strategy Framework Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supply Base Reduction Programs Supply base reduction is most often the initial supply chain management effort. Buyer-supplier partnerships are easier with a reduced supply base. Supply base reduction results in: Reduced purchase prices Fewer supplier management problems Closer and more frequent interaction between buyer and supplier Greater levels of quality and delivery reliability. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Evaluating & Selecting Key Suppliers When evaluating suppliers to be used in a strategic partnering, purchase cost becomes relatively less important.   Key Supplier Selection is conducted by a cross functional team selection approach wherein purchasing staff, primary users, product designers, and manufacturing personnel participate. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Strategic Alliance and Supplier Certification Programs Supplier certification programs are one way to identify strategic alliance candidates. Firms often develop their own formal certification programs, & most require ISO 9000 or similar certifications as one part of the certification process.   A site audit using a cross-functional team to identify a supplier’s process capabilities, materials and methods monitors base-line management practices. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Outsourcing Programs 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 Increased need for supplier management Increased reliance on the supplier.   Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Early Supplier Involvement Early supplier involvement (ESI) is perhaps one of the most effective supply chain integrative techniques. Under ESI, key suppliers become more involved in the internal operations of the firm, particularly with respect to new product and process design concurrent engineering and design for manufacturability techniques.   Value engineering activities help the firm to reduce cost, improve quality, and reduce new product development time. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Management and 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 and knowledge, and higher return on investment than competitors with no such strategic alliances. Alliance development will eventually even extend to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Managing & Developing Second-Tier Supplier Relationships Successful alliance development can indirectly create successful, high-performing second-tier & third-tier relationships.   Organizations may require direct suppliers to acquire goods and services from specific suppliers and under specific conditions. They can also work directly with supplier alliance partners in solving second-tier supplier problems, designing supplier selection and certification programs. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Managing & Developing Second-Tier Supplier Relationships- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Use of e-Procurement Systems Primary benefits of e-procurement include: Cost savings Free-up time to concentrate on core business E-procurement systems enable the concentration of a large volume of small purchases with a few suppliers in electronic catalogues, which are made available to the organization’s users.   Reverse auctions- suppliers enter Web site. At a pre-designated time and date, qualified suppliers try to underbid their competitors and can monitor the bid prices until the session is over. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Rewarding Supplier Performance Rewarding suppliers provides an incentive to surpass performance goals.   Punishment, a negative reward, may reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality. Strategic supplier agreements allow suppliers to A share of the cost reductions More business and/or longer contracts Access to in-house training seminars and other resources Company and public recognition Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Benchmarking Successful Sourcing Practices An effective way to improve supply chain performance. Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal and informal.   Resources are available to learn about and implement sourcing practices: The Center for Advanced Purchasing Studies. Supply-Chain Council. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Using Third-Party Supply Chain Management Services Third-party logistics (3PL) & other supply chain service providers are growing and may involve a firm’s sourcing, materials management, and product distribution responsibilities. These 3PL charge a fee for services while saving costs (estimated at 10 to 20% of total logistics costs); and improving service, quality, and profits for their clients.    Vendor-managed inventory (VMI) services is one of the more popular roles of 3PL. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Assessing and Improving the Firm’s Purchasing Function The purchasing function is one of the most value-enhancing functions in any organization, 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. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Relationship Management Software Skill set requirements of purchasing professionals have been changing. Purchasing personnel must today exhibit world-class skills such as:  Interpersonal communication Ability to make decisions Ability to work in teams Analytical skills Negotiation skills Customer focus Ability to manage change Influencing & persuasion skills Strategic skills Understanding business conditions Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing