1. Chapter 8 Outsourcing, Supplier Relations, and Supply Chain Management Gord Alsop Richard Chitty Meghan Cushing Alyson Gausby Seth Jutzi

2. Agenda Decision to Make or Buy – Richard Outsourcing – Alyson Purchaser-Supplier Relations – Gord Partnerships and Strategic Alliances – Seth Reverse Marketing / Supplier Development / SCM – Meghan Case: Peron Metal Fabricating Inc.

3. The Decision to Make or Buy It is becoming more common for firms to outsource activities previously done in-house This increases the firm’s flexibility allowing them to focus on their core activities

4. Reasons to Make Small quantities Unusual quality requirements Preserve technological secrets Obtain lower cost Minimize idle equipment Avoid sole-source dependency Pride

5. Reasons to Buy Lack administrative or technical experience in production Reputation of suppliers More flexibility of sources and substitutes Hard to reverse decisions if you decide to make Acquisition requires less overhead

6. Gray Zone in Make or Buy Range of options where not every situation leads to a 100% make or 100% buy option This may be useful when testing new products There is no commitment to make or buy

7. Subcontracting Subcontracting occurs when primary contractors contract part of their work to other contractors ie. Construction, aerospace Beneficial when orders take a long period of time, are extremely costly, or when work is difficult to define

8. Outsourcing To Make or not to Make? Gained prominence in 90s Public and Private Orgs outsourcing wide range of functions IS Mail Rooms Corporate Travel Logistics

9. Why Outsource? 19951998 Cost ReductionReduce and control operating costs Head-Count ReductionImprove company focus Focus on Core CompetenciesGain access to world-class capabilities Acquire and deploy peripheral knowledge or process technology Free internal resources for other purposes Minimize inventory and materials handlingResources are not available internally Reduce development and production cycle times Accelerate reengineering benefits Improve efficiencyFunction difficult to manage/out of control Reaction to positive media reportsMake capital funds available Share risks Cash infusion

10. Risks Loss of control Higher exit barriers Exposure to supplier risks Unexpected fees Conversion costs Supply restraints Unions

11. Outsourcing Purchasing Little outsourcing of Supply Activities Logistics tasks and functions widely outsourced Decision Making Matrix Flowchart Supply managers- add value to decision 12 34

12. Trends Impacting Supply Management Strategy Globalization IT External customer focus Product/Process technology Increasing job complexity Environmental/Legal issues Reengineering

14. The Matching Game: To Make or to Buy

15. Purchaser-Supplier Relations Driving force in the trend toward use of the term supply management Buyer-Supplier goodwill should be cultivated Progressive companies measure supplier goodwill on a regular basis

16. Purchaser-Supplier Satisfaction Model

17. Tools and Techniques for Moving Positions Crunch Tools – Negative measures to shift satisfaction levels Complete severance of purchases without advanced notice Refusal to pay bills Refusal to accept shipments Use or threat of legal action Stroking Techniques – Positive measures to shift satisfaction level Long-run commitment contracts Sharing of internal information Evidence of willingness to work toward changed behaviour in purchasing organization Rapid positive response to requests from suppliers

18. Purchaser-Supplier Relationship Management Framework underlines need for extensive communications for both parties Requires substantial coordination work inside purchaser’s organization Team approach to long-term supplier relations only reasonable option Immediate, concerted action needs to be taken when either side sees problems or opportunities Seller’s and purchaser’s personnel need to understand own organizations as well as other’s well Suppliers also need to develop effective working relationships internally

19. Types of Suppliers Unacceptable suppliers Acceptable suppliers Good suppliers Preferred suppliers Exceptional suppliers

20. Single Source Relationships Must Add Value Beware of: Excessive charges Low quality Poor delivery Lack of continuing improvement programs Value is ultimate long-term like cycle costs and benefits.

21. Buyer-Supplier Relationship Traditional Lowest price Specification-driven Short term, reacts to market Trouble avoidance Purchasing’s responsibility Tactical Little sharing of information on both sides Partnership Total cost of ownership End customer-driven Long term Opportunity maximization Cross-functional teams and top management involvement Strategic Both supplier and buyer share short and long term plans Share risk and opportunity Standardization Joint ventures Share data

22. The Developmental Path to Partnership 1) Supplier assessment 2) Supplier improvements 3) Supplier rationalization 4) Supplier alignment 5) Supplier partnership

23. Partnering Strategies and Outcomes Strategies 1. Decreased average delivery lot size 2. Decreased total number or suppliers 3. Decreased number of sources used per purchased item 4. Increased average contract / agreement length 5. Increased average frequency of delivery to the plant 6. Increased supplier involvement in quality certification programs Outcomes 1. Improved quality of the supplier’s operations / processes 2. Improved quality of incoming goods 3. Decreased supplier’s total cost 4. Decreased buying organization’s total cost 5. Improved supplier’s ability to handle buyer-initiated changes to the agreed-to delivery date 6. Improved buyer’s ability to handle supplier-initiated changes to the agreed-to delivery date

25. The Clock Game

26. Reverse Marketing/Supplier Development When no suitable supplier exists, purchaser must create one For Reverse Marketing the purchaser often approaches the supplier Persuades supplier to accept order, not other way around Only alternative other than making part in-house

27. Purchaser Initiative Purchaser may quote prices, terms, and conditions High payoffs for suppliers, hence supplier development Can apply to suppliers of all sizes

28. Reasons for Reverse Marketing Deficiencies in normal industrial marketing Neither party is often fully aware of all opportunities because of lack of aggressiveness by salesperson or lack of inquisitiveness by purchaser Certain product lines receive more attention and lag time may exist between time product is introduced and time purchaser is informed Purchaser aggressiveness ensures future supply

29. Three Outside Sources Driving Reverse Marketing Technological – New products, materials and processes Increase in International Trade – Development of foreign sources of supply Competitive Advantage in Supply Chain

30. Supply Chain Management Managing the entire flow of information, materials and services from raw materials to final consumer SCM different from supply management which focuses only on relationships

31. Characteristics of SCM Info sharing and monitoring Inventory Management Evaluations of costs Joint planning over long-term Coordination over all levels of business and management Leadership and Sharing in risk and return necessary

32. Goals of SCM Reduce uncertainty and risk Improve inventory levels, cycle time, processes and service levels Primary focus of SCM: Optimization

33. SCM Implementation Extremely difficult and complex Supply Network Diminishing leverage of purchaser

35. Secret X

36. Case 8-2: Paron Metal Fabricating Inc.

37. Summary Donald Mines- Materials Manager Considering Proposal to outsource manufacturing of outrigger brackets Company- 3 divisions- operate separately Trailer Sandblast/ Paint Metal fabricating

38. Manufacture 40 trailers/ yr 2/3 November- April Outrigger secures containers Comprised of 4 parts Solicited quotes from 3 local companies Lowest bid $108.20- Mayes Steel

39. Outsourcing Decision Solicited quotes from 3 local companies Lowest bid $108.20- Mayes Steel

40. Problem Statement Should Donald Mines chose to outsource all, some or none of the production of outrigger brackets?

41. Alternatives 1. Make outrigger brackets in-house 2. Buy outrigger brackets from Mayes 3. Make parts T-75 and T-77 in-house and buy T-67, T-69, T-70 from Mayes

42. Alternative Comparison MakeBuyHybrid Lead time2 weeks4 weeks Order Cost 0$75$45 Holding cost 20% Fixed Cost20%0 Total Cost$150.10$108.20$102.39

44. Showcase Showdown

45. Alternative Comparison MakeBuyHybrid Lead time2 weeks4 weeks Order Cost 0$75$45 Holding cost 20% Fixed Cost20%0 Unit Cost$150.10$108.20$102.39

46. To Buy Costs November to April Demand = 800*213 = 534 EOQ = 61 P = (20*534)/125 = 85 TC = $59,095.38

47. To Buy Costs May to October Demand = 266 EOQ = 43 P = 43 TC = $29,710.42 Yearly cost = $88,805.80

48. Benefits and Risks of Buying Benefits for buying Reduce and control operational costs Improve company focus Gain access to world- class capabilities Allow firm to focus on core competencies Risks of buying Loss of control Higher exit barriers Exposure to supplier risks Unexpected fees or extra use charges

49. To Make Costs Annually: TC = (800*150*1.2) + FC = $172,915.20

50. Benefits and Risks of Making Benefits for making Minimize idle equipment Avoid sole source dependency Maintain control over quality Maintain control over supply Risks of making May lose option to outsource in the future May divert attention from core competencies Increased operational costs Lose access to world- class capabilities

51. Hybrid Costs Assumption 1. Order costs = $15 per piece 2. Lead time stays the same 3. Fixed Costs = 20%

52. Hybrid Costs To buy T-67, T-69 and T-70 from November to April Demand = 534 EOQ = 57 P = 85 TC = $40,413.35

53. Hybrid Costs To buy T-67, T-69 and T-70 from May to October Demand = 266 EOQ = 40 P = 43 TC = $20,306.25

54. Hybrid Costs To make T-75 and T-77 annually Demand = 800 TC = $31,684.80 Total costs for all parts for the year = $92,404.40

55. Is outrigger manufacturing strategic? Is outrigger manufacturing critical to the business but not strategic? Evaluate Mayes Proposal Is Mayes proposal more desirable than Paron’s? Could Peron achieve similar results without supplier assistance? Negotiate contract to ensure expectations are realized Keep in-house Yes No

56. Solution Buy/Outsource Chart points to buying as best option Decision is cost effective Not a value-added service Allows alternate uses for facility capacities Requires less overhead

57. Thank you for listening Any questions or comments?