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 – Describe the difference between purchasing and strategic sourcing Describe how strategic sourcing plans are developed and implemented Define and describe the terms green sourcing, VMI, JIT II, in-sourcing, co-sourcing, and co-managed inventories Describe sourcing’s role in managing key supplier relationships ©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 – Describe the performance criteria used in assessing suppliers. Describe how strategic supplier relationships can impact the firm. Describe how a reverse auction works. Understand the importance of sharing the benefits of strategic partnerships. Understand the strategic role played by the purchasing function in developing & improving the supply chain. 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 Strategies Business Ethics is the application of ethical principles to business 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 Strategies (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

Ethical and Sustainable Sourcing Strategies (Continued) 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

Ethical and Sustainable Sourcing Strategies (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

Ethical and Sustainable Sourcing Strategies (Continued) 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

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

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) Electronic data interchange (EDI) Allows a supplier to profile demand & determine accurate forecasts EDI also provides reorder point data to permit timely deliveries Supplier co-location or JIT II Supplier’s employee is embedded in buyer’s purchasing department to forecast demand, monitor inventory & place orders with access to sensitive files & records

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. Reverse auctions – Pre-qualified suppliers enter Web site & at pre- designated time & date, try to underbid competitors, monitoring bid prices until the session is over.

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. Vendor-managed inventory (VMI) services – One of the more popular roles of 3PL. Lead logistics provider (LLP), aka 4PL – A primary 3PL provider; one that oversees other 3PL’s

Assessing & Improving the Firm’s Purchasing Function The purchasing 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) 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

Assessing & Improving Firm’s Purchasing Function (Continued) Assessment criteria include – Participating in and leading multifunctional teams Participate in value engineering efforts Optimize supply base Create ESI initiatives Utilize e-procurement Further supplier integration Contribute to new product development Improve time to market Initiate supplier cost reduction programs Creation of strategic alliances