Supplier Strategies in Sourcing Ppt

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					Benefits of Global Operations                                  Offshoring Opportunities
                  Reduce Direct and Indirect Costs
                  Reduce Capital Cost
    Tangible      Reduce Taxes
                  Reduce Logistics Costs
                  Overcome Tariff Barriers
                  Provide Better Customer Service
                  Spread Foreign Exchange Risk
                  Build Alternative Supply Sources
                  Preempt Potential Competitors
                  Learn from:
                     Local Suppliers/Customers/
                     Competitors/Foreign Research
   Intangible        Centers                                     Source: Offshoring and Beyond, McKinsey Quarterly, 2003

                  Attract Talent Globally                  1                                                               2

Changing Conditions                                            Upgrading the Strategic Role
    Need to treat foreign facilities or activity centers               Focus on intangible benefits
    as sources of competitive advantage                                     e.g. learning from local suppliers, gaining
       Trade pacts, reduction of tariffs                                    experience
          Lower need to set up foreign factories to                    Cultivate competencies
          overcome trade barriers
                                                                            Improve the inside
       Increased manufacturing/service sophistication
                                                                            Develop external resources
          Less emphasis on low wages
                                                                            Take a global mandate
       Pressure to create faster transfer of ideas from
       development to delivery                                         Create a robust network
          Need for closer inter-functional relationships                    Can absorb impacts of changes in the
                                                                       Plan for long-term commitment                       4

Paths to Higher Strategic Roles
                                                               Types of Product or Service Factories
                                                                   Offshore product or service factory
                                                                      Minimum setup investments, low-cost production
                                                                   Source product or service factory
                                                                      Broader strategic role, greater local control
                                                                   Server product or service factory
                                                                      Set up to offset costs (taxes, duties) and risk
                                                                   Contributor product or service factory
                                                                      Separate functions (R&D), more responsibilities
                                                                   Outpost product or service factory
                                                                      Primary role: information collection
                                                                   Lead product or service factory
                                                                      Creates new processes, products, and
                                                                      technologies                                         6
                                                                                        Five Themes

                                                                                           Historical and Current Frameworks of
       Sourcing Strategy                                                                   Global Outsourcing
                                                                                           Supplier Relationships
                                                                                           Supplier Development
                                                                                           Advances in Sourcing – Practices and


                                                                                                                               PORTER’S MODEL

                                                                                                                       Firm Infrastructure
                                                                                                     (general management, accounting, finance, strategic planning)
                                                                   Support Activities

                                                                                                                   Human Resources Management
                                                                                                                   (recruiting, training, development)

         Historical and Current                                                                                     Technology Development
                                                                                                             (R & D, product and process improvement)

       Frameworks in Sourcing                                                                                              Procurement
                                                                                                          (purchasing of raw materials, machines, supplies)
                                                   Theme 1
                                                                                         Inbound                                                   Marketing         Service
                                                                                                            Operations          Outbound
                                                                    Primary Activities

                                                                                         Logistics                                                 and Sales
                                                                                         (raw               (machining,         (warehousing                         (installation
                                                                                                            assembling,                                              repair,
                                                                                         materials                              and                promotion,
                                                                                                            testing                                                  parts)
                                                                                         handling                               distribution       pricing,
                                                                                         and                                    of finished        channel
                                                                                         warehous-                              product)           relations)

                                                                                           Source: Porter (1980)

     Disintegrated Supply Chain                                                                                      Internal Integration

      Information, Product, Service and Financial Flows                                                       Information, Product, Service and Financial Flows
                                                          E                                                                                                                          E
 M                                                        N                                           M                                                                              N
 A                INTERNAL ENTERPRISE                     D                                           A                                  ENTERPRISE                                  D
 T                                                                                                    T
 E                                                        C                                           E                                                                              C
                      The Great Divide
 R                                                        U                                           R                                                                              U
             Procurement          Distribution            S                                                                         Sourcing         Logistics                       S
 I                                                                                                    I
                  and                 and
 A                                                        T                                           A                                                                              T
             Manufacturing         Marketing
 L            Integration         Integration             O                                           L                                                                              O
 S                                                        M                                           S                                                                              M
                                                          E                                                                                                                          E
                                                          R                                                                                                                          R
                                                          S                                                                                                                          S

Source: Global Benchmarking and Supply Chain Project - MSU    11                              Source: Global Benchmarking and Supply Chain Project - MSU                                   12
              Enterprise Extension                                                              Stages of Global Sourcing Evolution*
                                                                                                 I - Basic         II - Moderate        III - Limited       IV- Fully Integrated
                                                                                                Beginnings         Development          Integration           Supply Chains
                               Relationship Management

              Information, Product, Service, Financial and Knowledge Flows
                                                                                                                                       Global sourcing        Global supply
            SUPPLIER                                                                   E                                               Strategic supplier     chains with
            NETW ORK                                                                   N                                                                      external customer
    M                                                                                                                                  alliances
                                     INTEGRATED                                        D                           Ad hoc supplier
    A                                                           DISTRIBUTIVE                                                           Supplier               focus
                                     ENTERPRISE                                                 Quality/cost
    T                                                             NETW ORK                                         alliances           development            Cross-enterprise
    E                                                                                  C        teams              Cross-                                     decision making
                                                                                       U                                               Total cost of
    R                                                                                           Longer -term       functional                                 Full service
                               Sourcing         Logistics
    I                                                                                           contracts                                                     suppliers
                                                                                       T                           sourcing teams      Parts/service
    L                                                                                  O        Volume             International       standardization        Early sourcing
    S                                 Operations                                       M        leveraging         sourcing            Early supplier         Insourcing/
                                                                                       E        Supply base                            involvement            outsourcing to
                                                                                       R                                                                      maximize core
                                                                                                consolidation      sourcing teams
                                                                                       S                                                                      competencies of
                                                                                                                                                              firms throughout
               Capacity, Information, Core Competencies, Capital and Human Resources                                                                          the supply chain

 Source: Global Benchmarking and Supply Chain Project - MSU                                      * Adapted from Monczka et al (2000)                                        14

                                                                                                Factors affecting Global Outsourcing
        Global Outsourcing Principles                                                               Comparative Advantage- low price contracts;
                                                                                                    Hassles in manufacturing – If can not be made
                                                                                                    in-house outsource
                                                                     Theme 2                        Decisions are made about individual parts
                                                                                                    rather than product families


                                                                                                Reasons for wrong outsourcing
Result of wrong outsourcing strategy                                                            decisions
   Lost Focus- Companies are trying to catch up                                                  Lack of coordination between different functions,
   with small manufacturers in cost and quality;                                                 inconsistent priorities and lack of accountability;
   Companies are manufacturing commodity                                                         Manufacturers fear long contracts/relationship
   products to achieve economies of scale; and                                                   would increase the bargaining power of suppliers;
   Erosion in capability or core competency of the                                               Managers lack of focus. They suffer from “Do it all
   company.                                                                                      here ”attitude;
                                                                                                 Companies had no analytical tool to
                                                                                                 distinguishing core parts from commodities; and
                                                                                                 Capacity & Labor issues- Capacity utilization and
                                                                                                 labor efficiency.

                                                                                           17                                                                               18
Outsourcing Model

                                                                                  Supplier Relationships
Based on the following three main principles:
  Focus on critical components and core
  competency;                                                                                      Theme 3
  Outsource components where suppliers have
  distinct competitive advantage; and
  Use outsourcing to generate employee
  commitment and improve productivity.


Kieretsu                                                            Evolution of Kieretsu
  A complex network of Japanese firms which pursues
  sourcing (goods, services & finances) from within the              Article compares the different approaches
                                                                     to Kieretsu by Matsushita, Hitachi and
  Characteristics of a typical kieretsu
     Several large firms like a major bank, trading company,
     chemical firm, steel unit, automobile industry etc              Additional article – HBR article on
     Cross-holding, favoritism, long-term relationship &
     interlocking directorates
                                                                     Chrysler’s experience with Kieretsu

                                                               21                                                22

Interesting updates
                                                                                Supplier Development
  The collapse of the powerful Mitsubishi
                                                                                                   Theme 4
  Nissan comes out of heavy losses and
  survival uncertainty when Carlos Ghosn
  takes charge and breaks the Kieretsu
Steps to Effective Supplier Development             Pitfalls

 Identify critical commodities                         Based on 200 companies with 83 actually
 Identify critical suppliers                           responding in a variety of industries.
                                                       Pitfalls generally occur in the last 3 or 4
 Form a cross-functional team (internally)
 Meet with suppliers’ top management                   Three types of pitfalls
 Identify key projects                                     Supplier-specific
 Define details of projects                                Buyer-specific
                                                           Buyer-supplier interface
 Monitor status and modify strategies

                                             25                                                                                      26

                                                    Key Sourcing Processes and Associative

           Advances in Sourcing :
             Practices and Tools
                                                     Supplier        Selection
                                                                                          Design                       Planning
                                   Theme 5           Scoring           And
                                                  And Assessment     Contract

                                                  Supplier Scorecards
                                                                                  Target Costing E-catalogs            Spend Analysis
                                                  Total Cost of Ownership
                                                                                  Value Analysis/ Online market places Supplier Relationship
                                                                                   Value Engg. Reverse auctions         Management (SRM)

                                                    The Role of Sourcing
Sourcing Processes                                  in a Supply Chain

                                                                   Sourcing is the set of business processes
     Supplier Scoring and Assessment                               required to purchase goods and services
     Supplier Selection and Contracts                              Sourcing processes include:
                                                                      Supplier scoring and assessment
     Design Collaboration
                                                                      Supplier selection and contract
     The Procurement Process                                         negotiation
     Sourcing Planning and Analysis                                   Design collaboration
                                                                      Sourcing planning and analysis
                                             29                                                                                      30
Benefits of Effective
Sourcing Decisions
                                                                  Supplier Scoring and Assessment
        Better economies of scale can be achieved if
        orders are aggregated                                      Supplier performance should be compared
        More efficient procurement transactions can                on the basis of the supplier’s impact on
        significantly reduce the overall cost of purchasing
        Design collaboration can result in products that
                                                                   total cost
        are easier to manufacture and distribute,
        resulting in lower overall costs
        Good procurement processes can facilitate                  There are several other factors besides
        coordination with suppliers
        Appropriate supplier contracts can allow for the           purchase price that influence total cost
        sharing of risk
        Firms can achieve a lower purchase price by
        increasing competition through the use of
                                                             31                                                                32

Supplier Assessment Factors                                       Supplier Scoring and Assessment

      Replenishment Lead             Pricing Terms                 Supplier Scorecard – Metalcraft
      Time                           Information                      Used in the sourcing module of IBUS 736
      On-Time                        Coordination                     Several local companies use this tool
      Performance                    Capability                         Bose
      Supply Flexibility             Design                             Sonoco
      Delivery Frequency /           Collaboration                 Total Cost of Ownership – USC project –
      Minimum Lot Size               Capability                    Class of 2003
      Supply Quality                 Exchange Rates,
      Inbound                        Taxes, Duties
      Transportation Cost            Supplier Viability      33                                                                34

Supplier Selection                                                Supply Chain Contracts
     Single vs. Multiple sourcing
       Single sourcing facilitates asset sharing, relationship     Contracts to increase product availability
       building and commitment                                       Incentives to stock
          Downside is highly risky                                 Contracts to coordinate supply chain costs
       Multiple sourcing promotes competition                        Forecasting/Planning (CPFR)
          Downside is promotes opportunism among suppliers
                                                                   Contracts to induce performance improvement
       Example : Lopez era in GM                                     Asset Specificity, Shared savings, Liberal credit terms
       Raises the objectivity level of assessment                  Comment: Government agencies tend to be experts in
       Promotes benchmarking                                        contract definition and stipulation; (Example: USC
                                                                    sourcing projects)
       Dynamic/Real time assessment
       Communication tool
                                                             35                                                                36
         Design Collaboration                                                  The Procurement Process

         50-70 percent of spending at a manufacturer is                        The process in which the supplier sends product
         through procurement                                                   in response to orders placed by the buyer
         80 percent of the cost of a purchased part is                         Goal is to enable orders to be placed and
         fixed in the design phase                                             delivered on schedule at the lowest possible
                                                                               overall cost
         Design collaboration with suppliers can result in
         reduced cost, improved quality, and decreased                         Two main categories of purchased goods:
         time to market                                                          Direct materials: components used to make finished
         Important to employ design for logistics, design
                                                                                 Indirect materials: goods used to support the
         for manufacturability                                                   operations of a firm
         Manufacturers must become effective design                              Differences between direct and indirect materials
         coordinators throughout the supply chain
                                                                     37                                                             38

Classification of Purchased Items                                           The Procurement Process
                         Direct Materials Indirect
                                          Materials                              Focus for direct materials should be on
        Use              Production       Maintenance,
                                          repair, and
                                                                                 improving coordination and visibility with
                                          support                                supplier
                                          operations             See
        Accounting       Cost of Goods    SG&A
                                                                 Recent          Focus for indirect materials should be on
                                                                 Study on        decreasing the transaction cost for each
        Impact on        Any delay will   Less direct
                                                                 Spend by        order
        Production       delay production impact                 CAPS
        Processing Cost  Low              High                                   Procurement for both should consolidate
        Relative to Value                                                        orders where possible to take advantage of
        of Transaction
        Number of         Low             High
                                                                                 economies of scale and quantity discounts
                                                                     39                                                             40

Product Categorization by Value and Criticality                             Sourcing Planning and Analysis
                                                                               A firm should periodically analyze its procurement
                                                                               spending and supplier performance and use this
    High                                                                       analysis as an input for future sourcing decisions
                  Critical Items        Strategic Items                        Procurement spending should be analyzed by part and
                                                                               supplier to ensure appropriate economies of scale

                                                                               Supplier performance analysis should be used to build
                                                                               a portfolio of suppliers with complementary strengths
                                                                                  Cheaper but lower performing suppliers should be
                  General Items         Bulk Purchase                             used to supply base demand
                                            Items                                 Higher performing but more expensive suppliers should
    Low                                                                           be used to buffer against variation in demand and
                                                                                  supply from the other source
                Low                                       High
                                                                     41                                                             42
                                               Making Sourcing
Sourcing Planning and Analysis
                                               Decisions in Practice
 Aggregate the spending                           Use multifunction teams
 Build a supplier portfolio                       Ensure appropriate coordination across
 Allocate demand to suppliers                     regions and business units
                                                  Always evaluate the total cost of
 Enabling tool: Supplier Relationship             ownership
 Management (SRM) module                          Build long-term relationships with key
 Example: Boeing’s use of SRM for parts           suppliers
 commonality consolidation and sourcing

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