1. Supply Chain Management (SCM) Sourcing
What is Sourcing?
Why is it important?
Supplier Management
Supplier Certification
Compiled by:
Alex J. Ruiz-Torres, Ph.D.
From information developed by many.

2. What is Sourcing?
Processes relating to the acquisition of the raw materials required to create the products of the organization.
Also called procurement or purchasing.
Includes
Selecting suppliers
Design collaboration with suppliers.
Information and operational collaboration with suppliers.
Negotiation and contracts.
Supplier certification and assessment.

3. Why is it important?
In manufacturing it can represent 40-60% of the cost of an item. Costs include:
Components and assemblies.
Packaging.
Transportation.
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 has
$420 in parts purchased from its suppliers (chip (Intel); hard-drive (Seagate)+ boards + displays;…) +
$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.
Thus any cost increases (or reductions) in materials has a significant effect on the bottom line.

5. Why is it important? Strategic alignment
Partnering with “correct suppliers” can lead to a competitive advantage.
Poor sourcing can result in lost business
Supplier’s ethical failures may tarnish the buyer’s image.
For example Apple’s case with suppliers in Asia related to worker abuse and the use of child labor.

6. Why is it important?
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.

7. 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).

8. Supplier Management
Supplier management starts with supplier selection.
Key message of supplier selection: supplier vision, mission, and performance must be aligned with the buying company’s priorities.
For example, if the vision/mission of the buying company relates to high quality and innovative products
It should select suppliers that focus on high quality and innovation.

9. Supplier Management Criteria to select suppliers
Cost / Discounts/ Payment terms
Quality
Lead time and on-time reliability
Capacity and volume flexibility
Technology, innovation, experience
Firm size, financials, …
Ethics, history, …
Systems and Information compatibility
Political stability and risk

10. Supplier Management Number of suppliers (vendors)
Sole versus multiple sourcing
Sole: strong partnership, less variability, but risk of failure
Multiple: competition between suppliers, risk mitigation, but more variability and no partner approach.

11. Supplier Management
Supplier Base Management: Management of relationships with suppliers, the evaluation of suppliers, and scouting new ones.
There has been a strong push for many years to reduce the number of suppliers. To simplify sourcing. To reduce the supplier base.

12. Supplier Management
ABC Classification of suppliers
Method to manage the supplier base established on the principle that not all suppliers are equally important to the organization.
A-type suppliers: Suppliers that sell us materials or services that
Critical to profitability and operations
Few qualified supply sources
Expensive items/ Large expenditures
Complex specifications
Therefore buying organization will focus on creating strong relationships with these; tracking their performance closely.

13. Supplier Management The other side:
C-type suppliers: Suppliers that sell us materials or services that
Standard specifications
Many existing alternatives
Low cost items/ Small expenditures
Therefore they are in principle easy to replace, therefore there should not be a significant emphasis on their management.
B-type Suppliers: somewhere in the middle.

14. Supplier Certification
Programs designed to management and evaluate suppliers
Goal is to track long term performance that allows some suppliers to become “partners”
Partner suppliers
Priority for new items being sourced
No need for incoming inspection
Higher level of information sharing