1. 11-1 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 11-2 Chapter 11 Sourcing

3. 11-3 Key Concepts The Strategic Sourcing Plan Discovering Potential Suppliers Evaluating Potential Suppliers Selecting Suppliers »Bidding Versus Negotiation »Reverse Auctions »Two-Step Bidding/Negotiation »The Solicitation »Weighted-Factor Analysis »Responsibility for Source Selection Developing Suppliers Managing Suppliers

4. 11-4 Key Concepts Additional Strategic Issues »Early Supplier Involvement »Supply Base Reduction »Single Versus Multiple Sourcing »Share of Supplier’s Capacity »Local, National and International Sourcing »Manufacturer or Distributor »“Green” Supply Management »Minority- And Women-Owned Business Enterprises »Ethical Considerations »Reciprocity

5. 11-5 The Strategic Sourcing Plan World class Supply Management requires supply management to develop a strategic sourcing plan that details how supply management will discover, evaluate, select, develop and manage a viable supplier base

6. 11-6 Strategic Sourcing Plan Stages Figure 11-1

7. 11-7 Discovery Supplier Web Sites Supplier Information Files Supplier Catalogs Trade Registers & Directories Trade Journals Phone Directories Filing of Mailing Pieces Sales Personnel Trade Shows Company Personnel Other Supply Management Departments Professional Organizations

8. 11-8 Evaluating Potential Suppliers Supplier Surveys Financial Condition Analysis Third Party Evaluators Evaluation Conference Facility Visits Quality Capability Analysis Capacity Capability Analysis Management Capability Analysis Service Capability Analysis Flexibility Capability Analysis Information Technology Capability Analysis

9. 11-9 Selecting Suppliers Bidding Versus Negotiation Reverse Auctions Two-Step Bidding/Negotiation The Solicitation Weighted-Factor Analysis Responsibility for Source Selection

10. 11-10 Bidding versus Negotiation Few topics generate more passionate discussions than bidding versus negotiation The selection of bidding or negotiation should be decided by using objective criteria, a total cost perspective and sound supply management logic

11. 11-11 Prerequisites to Bidding Dollar value must be large Specifications must be clear Market must consist of an adequate number of sellers Sellers must be qualified and want the contract Time available must be sufficient

12. 11-12 Conditions Demanding Negotiation Impossible to estimate costs with a high degree of certainty Price is not the only important variable Purchasing firm anticipates a need to make changes in the specification Special tooling of setup costs are major factors

13. 11-13 Even if the previous list is met… here are two arguments for Negotiation The negotiation process is far more likely to lead to a complete understanding of all issues of the procurement Competitive bidding tends to result in sacrifices in product quality, development efforts, and other vital services

14. 11-14 Reverse Auctions In contrast to competitive bidding, reverse auctions produce “real-time” interaction. Though effective for achieving cost savings, reverse auctions are not appropriate for all situations. Reverse bid process can have an adverse affect on long-term relationships.

15. 11-15 Two-Step Bidding/Negotiation Used in situations where inadequate specifications preclude the initial use of traditional competitive bidding The two steps are: »Step 1: Technical Proposals –IFBs for Step 2 are sent only to those sellers who submitted acceptable technical proposals »Step 2: Price Bidding

16. 11-16 The Solicitation IFB RFP Item description Info on quantities Delivery schedules Special terms and conditions Standard terms and conditions

17. 11-17 Weighted Factor Analysis Steps to developing »Develop factors to serve as criteria »Develop sub-factors or performance factors »Develop a scoring factor »Score or evaluate the supplier

18. 11-18 Developing Suppliers Development of suppliers is one of the greatest untapped frontiers in supply chain management Even suppliers recognized as the “best of the best” require investment on the part of the buying firm to realize the full benefit of the collaborative relationship This important topic is addressed in detail in the chapter on Supplier Development

19. 11-19 Managing Suppliers Managers must ensure the suppliers perform as required. Suppliers must meet the firm’s long-term needs. If suppliers are unlikely to meet future requirements the firm may: »Assist with financing / technological assistance. »Develop new sources. »Be required to develop the capability internally.

20. 11-20 Additional Strategic Issues Early Supplier Involvement Supply Base Reduction Single Versus Multiple Sourcing Share of Supplier’s Capacity Local, National and International Sourcing Manufacturer or Distributor “Green” Supply Management Minority- And Women-Owned Business Enterprises Ethical Considerations Reciprocity

21. 11-21 Early Supplier Involvement Early supplier involvement (ESI) is an approach in supply management to bring the expertise and collaborative synergy of suppliers into the design process ESI seeks to find “win-win” opportunities Today, early supplier involvement (ESI) is an accepted way of life at many proactive firms and a requirement for WCSM

22. 11-22 ESI Opportunities Materials Services Technology Specifications and Tolerances Standards Order Quantities Lead Time Processes Packaging Transportation Redesigns Assembly Changes Design Cycle Time Inventory Reductions

23. 11-23 Reasons for Utilizing ESI Get supplier inputs before the design is frozen Capitalize on the latest technology Save time since design cycles are getting shorter Let the supplier know that it is part of the team

24. 11-24 Supply Base Reduction Supply base reduction is achieved through both reducing variety and increasing consolidation Two benefits of supply base reduction cited by John Deere are: »increased leverage with suppliers »better focus and supplier integration in product development Increased leverage is also due to the increased involvement with the suppliers which builds goodwill and trust

25. 11-25 Considerations for Single Sourcing Lower total cost results from higher volume Quality considerations dictate Buyer obtains more influence with the supplier Lower costs to source, process, expedite, inspect Just-in-time requirements Significantly lower freight costs may result Special tooling is required Total system inventory will be reduced Supplier will have an improved commitment Improved interdependency and risk sharing result Time to market is critical

26. 11-26 Dual Sourcing Using the “70-30” Approach 70 percent of the volume is awarded to one supplier 30 percent to a second supplier Economies of scale are obtained from the “big supplier” The “little supplier” provides competition When the “big supplier” fails to perform the percentages may be reversed by the buyer

27. 11-27 Considerations for Multiple Sourcing Protect the buyer during bad times Maintain competition Provide a back-up source Meet local content requirements Meet customer’s volume requirements When the customer is a small player in the market for a specific item Avoid complacency on the part of a supplier When the technology path is uncertain Suppliers tend to “leapfrog” in technology

28. 11-28 Share of Supplier’s Capacity Many firms try to not exceed more than 15 to 25 percent of any one supplier’s capacity This issue became all too real in the early 2000s »Many companies cancelled orders that had long supplier lead times, which resulted in suppliers being caught with, in some cases, hundreds of millions of dollars of work-in- process

29. 11-29 Local, National and International Sourcing The lines between local, national, and international sourcing have become blurred in the last 30 years Local source »Firm’s headquarters and all facilities are located in the city or region where the materials or services will be used National source »The source is headquartered within the country and has facilities in multiple regions throughout the country International source »Firm is headquartered outside of the buying firm’s country, but this does not define the location of operations

30. 11-30 Local Buying Advantages Closer cooperation between buyer and seller is possible Delivery dates are more certain Lower prices can result from consolidated transportation and insurance Shorter lead times reduce inventory Rush orders are filled faster Disputes are usually more easily resolved Implied social responsibilities to the community are fulfilled

31. 11-31 National Buying Advantages Economies of scale Superior technical assistance Better handling of fluctuating demand Shortages are less likely

32. 11-32 Manufacturer or Distributor Potential Benefits of a Distributor over Buying Direct from the Manufacturer »Economy of scale »Reduction of orders »Reduction of paperwork »Special services »Technical advice »Credit

33. 11-33 “Green” Supply Management Recycled materials Environmental issues Liability issues

34. 11-34 Minority- And Women-Owned Business Enterprises Many forces motivate a buying firm to ensure that MWBE businesses receive a share of the firm’s business, such as: »Federal and state legislation »Set-aside quotas in government appropriations »Actions of regulatory bodies »Firm’s “corporate social consciousness” »Customer base includes MWBE businesses and their employees »Bottom-line profitability »Good business sense

35. 11-35 Ethical Considerations Conflicts of interest »Exists when supply managers must divide their loyalty between the firm which employs them and another firm »Such conflicts always should be avoided in all source selection decisions

36. 11-36 Reciprocity Reciprocity exists when supply managers give preference to suppliers that are also customers It is entirely legal to buy from one’s customers at fair market prices, without economic threat, and without the intent of restricting competition Reciprocity can become illegal when the activity restricts competition and trade

37. 11-37 Reasons to Not Engage in Reciprocity Reciprocity doesn't follow sound principles of buying and selling Companies may relax their competitive efforts as a result of reduced competition Sales departments may develop a false sense of security New customers may be hard to find because of pre-established relationships with competitors Company reputations may be impaired because of bad publicity Conspiracy and restraint-of-trade situations can develop, with their attendant legal dangers

38. 11-38 Concluding Remarks The increase in long-term collaborative relationships is highlighting the need to develop strategic sourcing plans The plan aids in source selection by detailing how suppliers will be discovered, evaluated, selected, developed and managed The plan should be developed in a collaborative environment that includes all relevant functional area representatives and supply chain members