Strategic Sourcing Dr. Ron Tibben-Lembke

Old View of the World One company does all processing, from raw material through delivery

Supply Network View of the World Integrated international networks of companies process, produce and distribute products.

Computer Example Wacker Siltronic makes silicon wafers: they buy sand, grow into long crystals slice into thin wafers

Chip Production Chip burned in a $2b “wafer fab” Wafer cut into chips and “packaged”

CD Drive Chip stuffed onto board by Solectron, Flextronics, etc. CD drive assembled by separate contract manufacturer Green Printed Circuit Board from different supplier CD drive, with a brand name on it, sold to Gateway

Vertical Integration Henry Ford’s River Rouge Plant Owned forests, iron mines, rubber plantation, coal mines Ships, railroad lines Dock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track 1927 Model A Production begins 15,000,000 cars in 15 years 120,000 employees in WWII

Spring Hill, Tennessee

Saturn Layout

Bullwhip Effect Lack of information sharing can cascade through the supply chain. Small changes at retail level lead to huge swings at manufacturing, like a bullwhip Several retailers order all at once, distributor thinks sales have jumped, orders a much bigger order, etc. Better: sales information shared across the “Value Chain.”

Supply Chain Designs Efficient – economies of scale Risk-Hedging – pooled resources, multiple sources of supply, share inv., need good IT Responsive – Changing consumer needs, mass customization, build-to-order Agile – responsive to changing needs, pooled resources Efficient Risk-Hedging Responsive Agile LowHigh Low High Supply Uncertainty Demand Uncertainty

Outsourcing - What is it? Transfer activities to outside providers Outside providers do activities Resources: people, facilities, equipment Decision-making responsibility OEM = Original Equipment Manufacturer name on the product, does not produce Flextronics or Solectron makes it for you

Outsourcing – Why do it? Financially-driven reasons Reduce assets, improve ROA Lower fixed costs Cash from selling capital equip. Improvement-driven reasons Better quality & productivity, cycle time Gain skills not otherwise available Associate with superior providers Organizationally-driven reasons Focus on what you do best More flexible capacity Employees: career paths

Make or Buy Decision DIY: Lower cost No capable suppliers Inadequate supply Competitive Issues Core competencies Specialization Low purchase cost Lack of capacity Want to gain skill Reduce inv. costs Management focus Patent issues Reasons to Make Reasons to Buy

What to not Outsource Core activities Key to the business Do not confer competitive advantage Strategic activities Key source of competitive advantage X-box – Microsoft never considered making Flextronics in Guadalajara $5 / hr vs. $1 in Doumen, China

Other Factors Degree of coordination with other activities Relationship-specific investments Easy to copy technologies, or low IP (intellectual properties) protection

Outsourcing in the News IT & telecommunications changes Nobody can tell you’re calling India White collar jobs – now it’s serious Educated workforces Call centers, programmers Privacy / security concerns

Outsourcing Example In 1981, IBM ‘PC’. Consumers care about hardware No one cares about the software that lets them talk to the processor. Outsourced the OS to whom?

Anybody heard of “Microsoft?” UCSD Pascal $450 CP/M$175 MS-DOS$60

Modular Components Take advantage of modules: parts or products previously prepared Restaurants: prepared ingredients, assembled to order Suppliers can develop new, interesting products to use more quickly, cheaply Variety is gained by different combinations of same components

Inventory Terms Inventory Turnover (turns) = Cost of goods sold / Average inv. Value Weeks of supply = ( Avg. Inv Value / CoGS ) * 52 Weeks

Supply Chain Technologies ASN -- lets customer know exactly what has been sent Standardization -- reduce number of variations of a part in use

Managing the Supply Chain Drop Shipping -- Supplier sends directly to the store, not to store’s warehouse Blanket orders -- Long-term pledge to buy certain amount, shipped quickly EDI -- standardized format for sending electronic information computer-to- computer

Mass Customization Highly customized Integrate design, processes, supply network Supply components cheaply to production points Fast, responsive production, quick delivery Higher weight, lower value

Managing the Supply Chain Postponement -- withhold any modification until as long as possible. Keep product generic “vanilla” HP Benetton Home Depot paint department Channel Assembly -- have distributor assemble products from components

HP Inkjet Printers Printers made in Vancouver, sent via ship through Panama Canal to Europe Europe warehouse stocks inventory by country physically different-- power supply manuals different languages Substitution not allowed Re-supply time very long

Euro Plugs No standardized power supplies for Europe Different power supply for every country.

HP Inkjet Printers Redesigned printers so that power supply added in Europe Re-engineer product, power supply Assembly done in a warehouse (Quality?) Manuals added in Europe Many expensive changes Store ‘vanilla’ boxes Postpone point of differentiation 25% cost reduction

Delayed Customization ProductionStorageShippingStorage Before After

Benetton Sweaters of undyed wool, dyed once demand is known Dyeing LT much faster than production How many undyed sweaters to make? How many Red, Green, Blue, also, if this production process is cheaper, and you know you’ll sell some minimum amount?

Behr Paints Small # of bases Small # tints Unlimited # combinations Keep stock colors on hand? How many gallons? Which ones? Lower labor costs Higher inventory costs

Electronic Data Interchange My computer talks to yours, tells you exactly what I want to order, when You fill out a form, very compressed message sent, viewed as form Software, hardware expensive to implement Sample Purchase Transaction ST88850*1Transaction Set identifier BEG*00*NE* **010698Beginning of Segment PID*X*08*MC**Large WidgetDescription of Product P01**5*DZ*4.55*TDBaseline Item Data CTT*1Transaction Totals SE*1*1End of Segment

XML e X tensible M arkup L anguage Standard for E-Business XML provides self-describing information. Much easier, faster to implement or modify than EDI. Expected to eventually, replace EDI, but not nearly as fast as was expected. Standardization through RosettaNet efforts