Sourcing and Pricing Module 4

Purchasing Objectives of Purchasing To avail Materials, supplies and Equipment at the Minimum possible costs. Ensure continuous Flow of production Increase asset turnover Develop Alternate sources of supply Establish and Maintain Good relations with suppliers Achieve maximum integration with other Departments of Company Train and Develop the Personnel Efficient Record keeping and Management Reporting

Policies affecting Purchasing Ancillary Development Make or Buy Speculative buying Vendor rating Ethics in purchasing Reciprocity Purchasing for Employees Gifts Value analysis

Outsourcing Classification of outsourcing 1. On the basis of Business Process (i) Information Technology outsourcing (ITO) (ii) Voice Outsourcing (iii) Non voice outsourcing 2. On the basis of Geographic Distance (i) In- shoring /On – shoring (ii) Near shoring (iii) Off-shoring

In-House or Outsource Steps involved in the in-house or outsourcing decision process, starting with the use of cross functional teams through the final deployment of the decision. Step 1 Assess Technology and Demand Trends Step 2 Assess Strategic Alignment and Core competencies Step 3 Conduct Total cost analysis of All In- house / out sourcing Alternatives Step 4 Consider Non- cost factors and reach consensus on the decision In House advantages, disadvantages Outsourcing advantage, disadvantaages

Third party Logistics The trend of using strategic partnerships in integrated logistics has become an accepted practice in the industry. These partners are called “ Third party service providers” , in short, 3PL firms. These firms are external to the company and provide one or more aspects of its entire logistics service product portfolio. These services can be provided on a stand alone or integrated basis.

Types of Third Party Logistics Dedicated ( or Exclusive) Distribution Operation Multi- User ( or Shared user) Distribution Operation Specialist Distribution Operation

Fourth party Logistics- 4PL A new trend has emerged wherein the IT firms are providing logistics solutions build around domain knowledge by third party logistics company. Revenue growth Operating Cost reduction Fixed capital reductions

Purchasing Procedure/process of Sourcing Decision Supplier scoring and Assessment Replenishment lead time On time performance Supply flexibility Delivery frequency/ minimum lot size Supply quality Inbound transportation cost Pricing terms Information coordination capability Design collaboration capability Exchange Rates, Taxes, and Duties Supplier viability

Supplier selection and contracts Negotiation On the basis of supplier scoring and assessment scorecard analysis , a list of promising suppliers will get. The firm can then select desired suppliers using a variety of mechanisms including offline competitive bids, reverse auctions, or direct negotiations. Supplier selection should emphasis on total cost of using a supplier and not just the purchase price. To improve overall profits, the supplier must design a contract that encourages the buyer to purchase more and increase the level of product availability. Three contracts that increase overall profit are as follows: Buy back contracts Revenue sharing contracts Flexible contracts

Design Collaboration Design collaboration – the collaboration of manufacturing and supply chain partners with research and development to allow integration of the design process across the supply chain and to allow feedback and resolution of design issues. Benefits- ( Design and supply chain collaboration) Efficiently add and support unlimited partners via convenient user administration tools. Encourage partner participation with streamlined and automated business processes that they would otherwise need to support manually Reduce data administration costs by enabling preferred suppliers to directly update select component information and documentation.

Design collaboration can lower the cost of purchased material and lower logistics and manufacturing cost. Design collaboration is important for a company trying to provide a lot of variety and customization because failure to do so can significantly raise cost of variety Working with suppliers can significantly speed up product development time Integrating the supplier into the design phase allows the manufacturer to focus on system integration, resulting in a higher quality product at a lower cost.

Procurement process When designing the procurement process it is important to consider goods that the processes will be used to purchase. There are 2 main categories of purchased goods which are as follows: 1. Direct Materials ( There are goods used to support the operations of a firm) 2. Indirect materials ( These are goods used to support the operations of a firm) Procurement process should have built in alerts that warn both the buyer and the supplier of potential mismatches between supply and demand.

Sourcing Planning and Analysis A firm must analyze its procurement spending and supplier performance and use this as input for future sourcing decisions. Important analysis is the aggregation of spending across and within categories and suppliers. Supplier performance – should be measured against plan on all dimensions that impact total cost such as responsiveness, lead times, on time delivery, quality and delivery spending and supplier performance analysis should be used to decide on the portfolio of suppliers to be used and the allocation of demand among the chosen suppliers.

Pricing The areas of Revenue management and Supply chain management represent of industries that procure and distribute consumer products. Revenue management is concerned with the management of the demand processes and the development of methodologies and systems required to support this management function. The area of SCM is concerned with the design of a supply process to match a given demand pattern as efficiently as possible.

Pricing and Revenue Optimization Process Involves 4 basic steps Step 1: Segmenting the Market Step 2: Calculating Customer Demand Step 3: Optimizing Prices Step 4: Recalibrating Prices

For Multiple customer segments Most situations involve multiple segments of customers, each segment having different price elasticity with a different demand curve for each sub- market. Have different price elasticity and hence provide an opportunity for revenue management. Eg: Hotel industry, Airlines Industry

For Perishable Assets Any asset that loses value over time is perishable. Problem of perish ability of valuable assets was at the origin of revenue management. 2 revenue management tactics used for perishable assets: 1. Vary price (dynamic pricing) over time to maximize expected revenue 2. Over book sales of the assets to account for cancellations

For Seasonal demand The purpose to use revenue management for seasonal demand is to shift demand from the peak to the off-period, thus can get better balance between supply and demand, and also generate higher overall profit. An effective revenue management tactic is to charge a higher price during the peak period and a lower price during off-peak periods is more than off-set by the decrease in cost because of a smaller peak and the increase in revenue during the off-peak period.

For Bulk and Spot contracts Most firms face a market where some customers purchase in b bulk at a discount and others buy single units or small lots at a higher price. Innovative pricing , like customized pricing does alter the demand curve and the firm must make sure that the supply chain function is kept in the decision making loop so that the supply chain is geared to handle this altered demand curve in a cost-effective way.