1. CHAPTER 4- STRATEGIC SOURCING FOR SUCCESFUL SUPPLY CHAIN MANAGEMENT
Principles of Supply Chain Management:
A Balanced Approach
Prepared by Daniel A. Glaser-Segura, PhD

2. © 2005 Thomson Business and Professional Publishing
Learning Objectives
You should be able to:
Describe how strategic sourcing plans are developed & implemented.
Describe the various strategic sourcing activities.
Describe purchasing’s role in managing key supplier relationships.
Describe performance criteria used to assess suppliers.
Describe how strategic supplier relationships impact the firm.
Describe how a reverse auction works.
Understand the importance of sharing benefits of strategic partnerships.
Understand the strategic role played by the purchasing function in developing and improving the supply chain.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

3. © 2005 Thomson Business and Professional Publishing
Chapter Four Outline
Developing Successful Sourcing Strategies
Supply Base Reduction Programs
Evaluating & Selecting Key Suppliers
Strategic Alliance & Supplier Certification Programs
Outsourcing Programs
Early Supplier Involvement
Supplier Management & Alliance
Managing & Developing 2nd-Tier Supplier Relationships
Use of e-Procurement Systems
Rewarding Supplier Performance
Benchmarking Successful sourcing Practices
Using Third-Party Supply Chain Management Services
Assessing & Improving Firm’s Purchasing Function
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

4. © 2005 Thomson Business and Professional Publishing
Introduction
Drivers of Strategic Sourcing
Reduce costs and delivery cycle times
Improve quality and long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce high costs of globalization and materials,
Deliver more innovative products more frequently & cheaply than competitors
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

5. Developing Successful Sourcing Strategies
Successful Sourcing Strategies are different for functional products and for innovative products.
Functional Products are MRO items and other commonly low profit margins with relatively stable demands and high levels of competition.
Innovative Products are characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

6. Developing Successful Sourcing Strategies- Cont.
The following is a framework for supply chain strategy development:
Step 1 The firm’s suppliers are classified as belonging either to the innovative or functional category.
Step 2 The goals and strategies of the inbound portion of the supply chain are developed.
Step 3 Supply chain capabilities are evaluated & compared to required performance.
Step 4 Set goals for improving capabilities.
Step 5 Implement work plan.
Step 6 Monitor progress & adjust the work plans.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

7. Developing Successful Sourcing Strategies- Cont.
Supply Chain Sourcing Strategy Framework
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

8. Supply Base Reduction Programs
Supply base reduction is most often the initial supply chain management effort.
Buyer-supplier partnerships are easier with a reduced supply base.
Supply base reduction results in:
Reduced purchase prices
Fewer supplier management problems
Closer and more frequent interaction between buyer and supplier
Greater levels of quality and delivery reliability.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

9. Evaluating & Selecting Key Suppliers
When evaluating suppliers to be used in a strategic partnering, purchase cost becomes relatively less important.
Key Supplier Selection is conducted by a cross functional team selection approach wherein purchasing staff, primary users, product designers, and manufacturing personnel participate.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

10. Strategic Alliance and Supplier Certification Programs
Supplier certification programs are one way to identify strategic alliance candidates. Firms often develop their own formal certification programs, & most require ISO 9000 or similar certifications as one part of the certification process.
A site audit using a cross-functional team to identify a supplier’s process capabilities, materials and methods monitors base-line management practices.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

11. © 2005 Thomson Business and Professional Publishing
Outsourcing Programs
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
Increased need for supplier management
Increased reliance on the supplier.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

12. Early Supplier Involvement
Early supplier involvement (ESI) is perhaps one of the most effective supply chain integrative techniques.
Under ESI, key suppliers become more involved in the internal operations of the firm, particularly with respect to new product and process design concurrent engineering and design for manufacturability techniques.
Value engineering activities help the firm to reduce cost, improve quality, and reduce new product development time.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

13. Supplier Management and 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 and knowledge, and higher return on investment than competitors with no such strategic alliances.
Alliance development will eventually even extend to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

14. Managing & Developing Second-Tier Supplier Relationships
Successful alliance development can indirectly create successful, high-performing second-tier & third-tier relationships.
Organizations may require direct suppliers to acquire goods and services from specific suppliers and under specific conditions. They can also work directly with supplier alliance partners in solving second-tier supplier problems, designing supplier selection and certification programs.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

15. Managing & Developing Second-Tier Supplier Relationships- Cont.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

16. Use of e-Procurement Systems
Primary benefits of e-procurement include:
Cost savings
Free-up time to concentrate on core business
E-procurement systems enable the concentration of a large volume of small purchases with a few suppliers in electronic catalogues, which are made available to the organization’s users.
Reverse auctions- suppliers enter Web site. At a pre-designated time and date, qualified suppliers try to underbid their competitors and can monitor the bid prices until the session is over.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

17. Rewarding Supplier Performance
Rewarding suppliers provides an incentive to surpass performance goals.
Punishment, a negative reward, may reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality.
Strategic supplier agreements allow suppliers to
A share of the cost reductions
More business and/or longer contracts
Access to in-house training seminars and other resources
Company and public recognition
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

18. Benchmarking Successful Sourcing Practices
An effective way to improve supply chain performance. Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal and informal.
Resources are available to learn about and implement sourcing practices:
The Center for Advanced Purchasing Studies.
Supply-Chain Council.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

19. Using Third-Party Supply Chain Management Services
Third-party logistics (3PL) & other supply chain service providers are growing and may involve a firm’s sourcing, materials management, and product distribution responsibilities.
These 3PL charge a fee for services while saving costs (estimated at 10 to 20% of total logistics costs); and improving service, quality, and profits for their clients.   
Vendor-managed inventory (VMI)
services is one of the more
popular roles of 3PL.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

20. Assessing and Improving the Firm’s Purchasing Function
The purchasing function is one of the most value-enhancing functions in any organization, 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.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing

21. Supplier Relationship Management Software
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
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© Thomson Business and Professional Publishing