1. 13-1 Sourcing Decisions in a Supply Chain Supply Chain Management

2. 13-2 The Role of Sourcing in a Supply Chain uSourcing is the set of business processes required to purchase goods and services uSourcing processes include: –Supplier assessment –Supplier selection and contract negotiation –Design collaboration –Procurement

3. 13-3 Benefits of Effective Sourcing Decisions uBetter economies of scale can be achieved if orders are aggregated uMore efficient procurement transactions can significantly reduce the overall cost of purchasing uDesign collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs uAppropriate supplier contracts can allow for the sharing of risk uFirms can achieve a lower purchase price by increasing competition through the use of auctions

4. 13-4 Supplier Scoring and Assessment uSupplier performance should be compared on the basis of the supplier’s impact on total cost uThere are several other factors besides purchase price that influence total cost

5. 13-5 Supplier Assessment Factors uReplenishment Lead Time uOn-Time Performance uSupply Flexibility uDelivery Frequency / Minimum Lot Size uSupply Quality uInbound Transportation Cost uPricing Terms uInformation Coordination Capability uDesign Collaboration Capability uExchange Rates, Taxes, Duties uSupplier Viability

6. 13-6 Supplier Selection- Auctions and Negotiations uSupplier selection can be performed through competitive bids, reverse auctions, and direct negotiations uSupplier evaluation is based on total cost of using a supplier

7. 13-7 Contracts and Supply Chain Performance uContracts for Product Availability and Supply Chain Profits –Buyback Contracts –Revenue-Sharing Contracts –Quantity Flexibility Contracts uContracts to Coordinate Supply Chain Costs uContracts to Increase Agent Effort uContracts to Induce Performance Improvement

8. 13-8 Contracts for Product Availability and Supply Chain Profits uMany shortcomings in supply chain performance occur because the buyer and supplier are separate organizations and each tries to optimize its own profit uTotal 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 uAn approach to dealing with this problem is to design a contract that encourages a buyer to purchase more and increase the level of product availability uThe supplier must share in some of the buyer’s demand uncertainty, however

9. 13-9 Contracts for Product Availability and Supply Chain Profits: Buyback Contracts uAllows a retailer to return unsold inventory up to a specified amount at an agreed upon price uIncreases the optimal order quantity for the retailer, resulting in higher product availability and higher profits for both the retailer and the supplier uDownside is that buyback contract results in surplus inventory that must be disposed of, which increases supply chain costs uCan also increase information distortion through the supply chain because the supply chain reacts to retail orders, not actual customer demand

10. 13-10 Contracts for Product Availability and Supply Chain Profits: Revenue Sharing Contracts uThe buyer pays a minimal amount for each unit purchased from the supplier but shares a fraction of the revenue for each unit sold uDecreases the cost per unit charged to the retailer, which effectively decreases the cost of overstocking uCan result in supply chain information distortion, however, just as in the case of buyback contracts

11. 13-11 Contracts for Product Availability and Supply Chain Profits: Quantity Flexibility Contracts uAllows the buyer to modify the order (within limits) as demand visibility increases closer to the point of sale uBetter matching of supply and demand uIncreased overall supply chain profits if the supplier has flexible capacity uLower levels of information distortion than either buyback contracts or revenue sharing contracts

12. 13-12 Contracts to Coordinate Supply Chain Costs uDifferences in costs at the buyer and supplier can lead to decisions that increase total supply chain costs uExample: Replenishment order size placed by the buyer. The buyer’s EOQ does not take into account the supplier’s costs. uA quantity discount contract may encourage the buyer to purchase a larger quantity (which would be lower costs for the supplier), which would result in lower total supply chain costs uQuantity discounts lead to information distortion because of order batching

13. 13-13 Contracts to Increase Agent Effort uThere are many instances in a supply chain where an agent acts on the behalf of a principal and the agent’s actions affect the reward for the principal uExample: A music system dealer who sells the MS of a manufacturer, as well as those of other manufacturers uExamples of contracts to increase agent effort include two-part tariffs and threshold contracts uThreshold contracts increase information distortion,

14. 13-14 Contracts to Induce Performance Improvement uA buyer may want performance improvement from a supplier who otherwise would have little incentive to do so uA shared savings contract provides the supplier with a fraction of the savings that result from the performance improvement uParticularly effective where the benefit from improvement accrues primarily to the buyer, but where the effort for the improvement comes primarily from the supplier

15. 13-15 Design Collaboration u50-70 percent of spending at a manufacturer is through procurement u80 percent of the cost of a purchased part is fixed in the design phase uDesign collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market uImportant to employ design for logistics, design for manufacturability uManufacturers must become effective design coordinators throughout the supply chain

16. 13-16 The Procurement Process uThe process in which the supplier sends product in response to orders placed by the buyer uGoal is to enable orders to be placed and delivered on schedule at the lowest possible overall cost uTwo main categories of purchased goods: –Direct materials: components used to make finished goods –Indirect materials: goods used to support the operations of a firm uFocus for direct materials should be on improving coordination and visibility with supplier uFocus for indirect materials should be on decreasing the transaction cost for each order uProcurement for both should consolidate orders where possible to take advantage of economies of scale and quantity discounts

17. 13-17 Making Sourcing Decisions in Practice uUse multifunction teams uEnsure appropriate coordination across regions and business units uAlways evaluate the total cost of ownership uBuild long-term relationships with key suppliers

18. 13-18 Outsourcing uOutsourcing components have increased progressively over the years uSome industries have been outsourcing for an extended time –Fashion Industry (Nike) (all manufacturing outsourced) –Electronics Industry »Apple (over 70% of components outsourced)

19. 13-19 Not Just Manufacturing but Product Design, Too… uTaiwanese companies now design and manufacture most laptop sold around the world uBrands such as Hewlett-Packard collaborate with Asian suppliers on the design.

20. 13-20 Questions/Issues with Outsourcing uWhy do many technology companies outsource manufacturing, and even innovation, to Asian manufacturers? uWhat are the risks involved?

21. 13-21 Outsourcing Benefits and Risks Benefits uEconomies of scale –Aggregation of multiple orders reduces costs, both in purchasing and in manufacturing uRisk pooling –Demand uncertainty transferred to the suppliers –Suppliers reduce uncertainty through the risk-pooling effect uReduce capital investment –Capital investment transferred to suppliers. –Suppliers’ higher investment shared between customers.

22. 13-22 Outsourcing Benefits uFocus on core competency –Buyer can focus on its core strength –Allows buyer to differentiate from its competitors uIncreased flexibility –The ability to better react to changes in customer demand –The ability to use the supplier’s technical knowledge to accelerate product development cycle time –The ability to gain access to new technologies and innovation. –Critical in certain industries: »High tech where technologies change very frequently »Fashion where products have a short life cycle

23. 13-23 Outsourcing Risks Loss of Competitive Knowledge uOutsourcing critical components to suppliers may open up opportunities for competitors uOutsourcing implies that companies lose their ability to introduce new designs based on their own agenda. uOutsourcing the manufacturing of various components to different suppliers may prevent the development of new insights, innovations, and solutions that typically require cross-functional teamwork.

24. 13-24 Examples of Outsourcing Problems IBM uPC market entry in 1981 uOutsourced many components to get to market quickly u40% market share by 1985 beating Apple as the top PC manufacturer uOther competitors like Compaq used the same suppliers uBehind Compaq’s 10% leading share uLed to eventual sale of PC business to Lenovo

25. 13-25 Framework for Make/Buy Decisions uHow can the firm decide on which component to manufacture and which to outsource? uFocus on core competencies –How can the firm identify what is in the core? –What is outside the core?

26. 13-26 Two Main Reasons for Outsourcing uDependency on capacity –Firm has the knowledge and the skills required to produce the component –For various reasons decides to outsource uDependency on knowledge –Firm does not have the people, skills, and knowledge required to produce the component –Outsources in order to have access to these capabilities.

27. 13-27 Outsourcing Decisions at Toyota uAbout 30% of components in-sourced uEngines: –Company has knowledge and capacity –100% of engines are produced internally uTransmissions –Company has the knowledge –Designs all the components –Depends on its suppliers’ capacities –70 % of the components outsourced uVehicle electronic systems –Designed and produced by Toyota’s suppliers. –Company has dependency on both capacity and knowledge