1. GEOP 4355 Supply Networks: Sourcing Basics
Outline
What is sourcing?
Why is it important?
Sourcing decisions
Negotiation and contracts
Sourcing and IT
Sources/references used in the preparation of this presentation are listed in the Introduction presentation

2. What is Sourcing?
Processes related to the acquisition of the raw materials required to create the products of the organization
Includes
Supplier (s) selection and design collaboration
Information and operational collaboration between suppliers and the enterprise
Negotiation and contracts
Outsourcing decisions
Supplier certification and assessment
Determining the timing and size of orders (inventory management)

3. Why is it important?
In manufacturing sourcing can represent 40-60% of the cost of an item. Costs include:
Components and assemblies.
Packaging.
Transportation: related to where we buy from.
Warehousing and inventory management.
Customs, quotas, and tariff issues.

4. Why is it important?
For example a computer that costs Dell $1,000 to make
$420 in parts purchased from its suppliers: chip (Intel); hardrive (Seagate); boards; other components;…) +
$10 for packaging,
$12 in transportation of these parts to the Dell factory,
$9 for raw material storage,
$15 for tariffs for some parts from China.
Thus $446 out of $1,000 relates to sourcing decisions.

5. Why is it important? Strategic alignment
Partnering with “correct suppliers” can lead to a competitive advantage.
Poor sourcing can result lost business and higher costs
Higher costs than competition by using inefficient suppliers.
Delivery and quality problems.
When customers complain, the enterprise can’t blame quality or delivery problems from its supplier. The customer will not accept that excuse; is not their problem.

6. Why is it important?
Recent cases where supplier problems have severely affected the buying company include
Samsung’s Note 7 phones: supplier batteries caused explosions (supplier: Amperex Technology Limited).
Takata air bags that deployed with too much force. This recall affecting multiple auto manufacturers including Honda, Fiat, Ford, BMW (total of 11 manufacturers).
The costs of these supplier problems were in the billions ($17 billion for Samsung).

7. Why is it important?
Sourcing is a critical component of the lean philosophy embraced by many manufacturers and service providers (for example lean healthcare)
In Lean /just in time systems
There is more dependency on suppliers for design input (early involvement – they are responsible for design)
The supply process is more frequent (frequent small deliveries)
The supply process must be more reliable (buyer has small inventories, thus need reliable deliveries)
No incoming inspection, thus supplier is fully responsible for its quality
Simplified PO/ Receiving processes (reduce/eliminate ordering costs)

8. Sourcing decisions
Multi-functional decisions. Requires consideration from multiple functions (it affects the performance of …)
Sales / marketing – forecasts/ seasons, product options
Engineering – design specifications
Quality – quality criteria
Information Systems – communication / information transfer
Finance and accounting – terms of payment and billing method,
Production planning – quantities to be ordered
Logistics – transportation mode, customs issues

9. Sourcing decisions Ethical/ Moral Issues
Actions by a supplier can tarnish the image of the buyer.
Suppliers who exploit their workers/ employ children.
Maybe allowed in their location, but is partnering with this supplier a good idea?
Suppliers that pollute the environment/ do not follow environmental regulations.

10. Negotiation and contracts
Many shortcomings in supply chain performance occur because the buyer and supplier are separate organizations and each tries to optimize its own profit
Total supply chain profits might therefore be lower than if the supply chain coordinated actions to have a common objective of maximizing total supply chain profits
Company X wants to sell only in CL to reduce its transportation costs
But this makes the buyer have excess inventory which increases inventory and warehousing costs, obsolescence, …
However, a better solution with higher profits for both sides could be found if the constraints and costs for both sides are considered and negotiations had a total systems view.

11. Negotiation and contracts
Issues to be considered as part of contracts
Surplus inventory
Changes in requirements (volume and timing)
Sharing of performance improvement savings
Length of contract
Cost changes

12. Vendor Managed Inventory
Supplier controls/ manages/owns the inventory at the customer’s location
Therefore the supplier determines the appropriate replenishment policies and safety stock
The buyer provides planned use information and expected service level

13. Sourcing and Receiving
Receiving: process of accepting shipments. This often includes
Verification of Bill of Lading versus the actual items.
Sorting materials
Coordination with Quality Assurance department for inspections/ audits/ samples
Locating the materials in storage
Moving arriving materials directly to the production line (JIT)

14. Sourcing and IT
Information technology platforms are used to track supplier performance
IT modules to purchase and track incoming materials
E-Procurement:
Websites that provide product information (catalogs)
Platforms to create RFQ and accept bids,
Platforms to order, pay, track,…

15. Sourcing and IT Real time connectivity – operational information
Production plans
Inventory levels
POs
Kanban cards
Long term – operational information
Forecasts
Long term – products
New product collaboration
Life cycle plans
Cost information
Information technology
integration