Supply Chain Management Lecture 7 – Supplier Planning & Selection Alexa Kirkaldy

Lecture 7 - Learning Objectives On completion you will be able to: Recognise the importance of supply planning for any firm and the main steps in this process Appreciate that a firm needs a portfolio of approaches to supply depending on the supply risk and financial impact of the purchase Be aware that in the West supply planning in the last 20 years has also involved reducing the number of suppliers dealt with and that selection of the right suppliers is a critical process

Strategic Planning Steps Steele and Court (1996) define the purpose of supply planning as: “To ensure the existence of a supply-market to which the buying organization has ready access and which enables it to succeed as a business both now and in the future.” Supply Planning Supplier Selection Contract & Relationship Strategy Time 5

Elements of Supply Planning positioning Supplier preferences Risk management Current market position etail. Supplier Development programme Procurement marketing Reverse marketing Optimising the Supply Base Ideal market position Based on Steele and Court (1996 p. 32) 7

Kraljic’s Supply Positioning Low High Supply risk Leverage items Alternative sources of supply available Substitution possible Bottleneck items Monopolistic market Large entry barriers Routine items Large product variety High logistics complexity Labour intensive Strategic items Critical for product’s cost price Dependence on supplier Competitive bidding System contracting + E-commerce solutions Performance based partnership Secure supply + search for alternatives Supply’s impact on financial results

Elements of Supply Planning positioning Supplier preferences Risk management Current market position Supplier Development programme Procurement marketing Reverse marketing Optimising the Supply Base Ideal market position Based on Steele and Court (1996 p. 32) 7

Supplier Preferences Market Segmentation by the Supplier Development Core Nurture client Expand business Seek new opportunities Cosset client Defend rigorously High service & response Attractiveness of account Nuisance Exploitable Drive premium price Seek short-term advantage Risk losing customer Give low attention Low interest Lose without pain Steele and Court (1996 p. 69) Relative value of business or account 14

Supplier Preferences - Exercise Nurture client Expand business Seek new opportunities Cosset client Defend rigorously High service & response Give low attention Low interest Lose without pain Drive premium price Seek short-term advantage Risk losing customer Development Core Nuisance Exploitable Attractiveness of account Relative value of business or account Consider a local restaurant in Coventry ( supplier) reviewing its customers Domestic Students arriving late at night, little money, drunken Affluent international students Local people living in Coventry Christmas / New Year Parties

Elements of Supply Planning positioning Supplier preferences Risk management Current market position So, we have looked at Supply Positioning, Supplier Preferences We have considered Risk as part of Supply Positioning. Also, for each item we buy or each supplier we buy from we need to consider what the risks of buying from them might be. Where are they located in the world - what is the chance of a flood, earthquake, war, variation in exchange rate etc.? Will the supplier stay in business - could the company become bankrupt? We should now have a good picture of the Current Market Position. We now need to look at ways to improve and move towards our ideal market position. First up is to consider Procurement marketing. Supplier Development programme Procurement marketing Reverse marketing Optimising the Supply Base Ideal market position Based on Steele and Court (1996 p. 32) 7

Procurement Marketing Factors that may attract suppliers according to Steele and Court include: Prospect of on-going profitable business. Certainty of prompt payment according to contractual terms. Prestige from being a supplier to a ‘blue chip’ organisation. Use of simple procurement systems with straightforward uncomplicated contracts. Genuine opportunity to grow because of the association. Buying organisation is straightforward and open minded. Potential to learn from the customer (supplier development) or other suppliers (supplier associations and networks) This is about selling your organisation as a good place for suppliers to do business. Give example of JIT arrangements with suppliers at Lansing Short lead time - no messing them about Quick payment - 30 days not 60-90. Forecasts - long term view of business Potential for new business. Could use Unipart example. 17

Elements of Supply Planning positioning Supplier preferences Risk management Current market position Remember, reverse marketing - If I can not find anyone to buy from I may be able to persuade an existing supplier to enter the market -. Rather than the supplier coming to us to offer to sell we go to the supplier offering to buy. Supplier development programme.If we have to continue with the current supplier but they are not performing satisfactorily we can help them to improve. Now consider optimising the supply base. How many different suppliers are we buying from? Should this be increased or reduced? What is the optimum or best number of suppliers? Supplier Development programme Procurement marketing Reverse marketing Optimising the Supply Base Ideal market position Based on Steele and Court (1996 p. 32) 7

Optimising the Supply Base Size According to Monczka and Trent “Supply-base optimisation is the process of determining the number and most appropriate suppliers a buying firm should maintain. The process requires the elimination of suppliers from the supply base who are not capable of achieving world class standards, either currently or in the near future.” .

Supply Base Optimisation Womack et al’s Cross Regional Comparison of Automotive Suppliers Lamming found Japanese companies had 3 approaches; Single sourcing Dual sourcing because one supplier can not provide the required volume/variety/delivery requirements Dual sourcing of non strategic parts using a traditional ‘leveraged approach’

Strategic Planning Steps Steele and Court (1996) define the purpose of supply planning as: “To ensure the existence of a supply-market to which the buying organization has ready access and which enables it to succeed as a business both now and in the future.” Supply Planning Supplier Selection Contract & Relationship Strategy Time 5 14

Supplier Selection 1 Set up Selection criteria Initial Contact Total quality management policy BS 5750/ ISO 9000 certification or equivalent Implementing latest techniques e.g. JIT, EDI In-house design capability Ability to supply locally or world-wide as appropriate Consistent delivery performance, service standards and product quality Attitude on total acquisition cost Willingness to change, flexible attitude of management and workforce Initial Contact Your company - history, size of operations, countries of operation etc. Yourself - contact information and role in the organisation. Your project - give a realistic estimate of annual volume. Request for information the aim here is to get enough information to easily eliminate unsuitable suppliers. Information to request includes catalogues, data sheets, annual sales volume and sales contact information.

Supplier Selection 2 Formal evaluation – RFP process Price quotation Financial data Reference checking Supplier visit Audits, assessments or surveys Pilot / Test manufacturing batch.

Supplier Selection & Evaluation Categorical Methods

Supplier Selection & Evaluation Cost Ratio Method

Supplier Selection & Evaluation Linear -Averaging Method

Comparison of the 3 Methods

Supplier Selection - 7 Steps Model can be used for selecting supplier of a product or an outsourced logistics service provider Profile outsourcing requirement 1 Develop procurement strategies 2 Generate supplier portfolio 3 RFP / ITT or Direct Action Plan 4 Negotiate and select competitive supplier(s) 5 Integrate suppliers into operations 6 Continuous benchmarking and improvement 7 Set-up commodity team Define outsourcing scope Identify sourcing constraints Define priorities and organise team work Identify milestones Prepare and manage data collection Savings Collect information on supplier market Analyse supplier market Identify sourcing strategy levers Formalize sourcing strategy Screen candidate suppliers Define potential suppliers evaluation criteria Generate RFI Select suppliers for RFP Prepare and launch RFP Monitor RFP process Analyse RFP returns Or Direct negotiations plan and strategy or supplier development plan Analyse suppliers proposals Define negotiation strategy Negotiate with suppliers Build and validate recommendation (ROI, Payback etc) Finalize and sign corporate contracts Define implementation plan Communication on sourcing results Set up tracking systems Finalise contracts at local level Define supplier monitoring process Set up supplier continuous improvement teams Perform periodical re-evaluation Saving reports Define a new sourcing plan Key Objectives RFI – Request for information RFP – Request for proposal ITT – Invitation to tender ROI – Return on investment Source: FT Group Sourcing 2009

Lecture 7, Key Points & Tips In designing the supply chain there are three main tasks; supply planning, supplier selection and relationship management. In supply planning there are seven aspects to consider, supply positioning, supplier preferences, risk management, procurement marketing, reverse marketing, supply base optimisation and supplier development. Supply positioning is one of the most important tools to help firms prioritise SCM and procurement efforts and Kraljic’s matrix appears in many SCM and procurement texts. Considering the supplier’s own preferences for customers is less well recognised and reflects the fact that SCM has been lead by powerful, large firms who have strong bargaining power over the suppliers.

Lecture 7, Key Points & Tips Procurement marketing is another less familiar theme that requires to firm to consider how good a customer they are for the supplier. Reverse marketing considers the situation where there are not enough suitable sources of supply and considers what the firm can do to encourage new suppliers. Optimising the supply base in the west has meant reducing the number of suppliers dealt with and has accompanied moves to build more partnerships in markets with slow growth. When dealing with fewer suppliers it is vital that the best ones are selected and therefore the process of supplier selection must be handled very careful, taking into account the risks.

Lecture 7, Key Points & Tips To select suppliers there is a variety of evaluation methods proposed in academic texts and journals and include the categorical, cost ratio and linear averaging methods. You need to read the accompanying notes carefully as we have only had time to cover the principles in the lecture. You need to be able to explain the 7 elements of supply planning, be able to draw and apply Kraljic’s matrix and the supplier preference matrix. You also need to be aware of the main steps to take when selecting a supplier and be able to explain how to use at least one evaluation method.

For next time. Read the Case Study – Designing a Hybrid Global Sourcing Strategy What analysis would you do to answer Donna’s questions? Any alternatives to the task force approach? What steps on culture shock? Read the chapter ‘Strategic Supplier Selection’ - Cousins Possible oral presentation questions How do firms go about rationalizing their supply base? Is centralised purchasing the best solution? How do firms find out about new suppliers and approve them in this supply chain? What mechanisms for suppler selection are used and could they be improved in this supply chain?