Key Concepts

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Key Concepts

Purchasing, Supply Management, and Supply Chain
Management Defined
– Increasing Importance of Purchased Materials.

Supply Management’s Impact on the Bottom Line
– Increased Sales
– aster to Mar!et or "ime#Based Competition

Supply Management and $eturn on In%estment

"he Progression to Proacti%e Supply Management
1-1
Si& Key Business unctions
'Supply Management’s $ole in Business(
). Creation, the idea or design function, fre*uently +ased on
research and de%elopment
,. inance, the capital ac*uisition, financial planning and control
function
-. Personnel, the human resources and la+or relations function
.. Supply, the ac*uisition of re*uired materials, ser%ices, and
e*uipment
/. Con%ersion, the transformation of materials into economic
goods and ser%ices
0. Distri+ution, the mar!eting and selling of goods and ser%ices
produced
1-2
1%olution of Purchasing unction

Purchasing2 a Dynamic Profession

"ransition to Supply Management

3ider in Scope

4alue#5dding Benefits

Strategic ocus

4alue65dding Benefits

Strategic ocus
1-3
Supply Management

5 i%e Stage Process
– Identification of item or ser%ice re*uired

Identification of +est supplier
– 1sta+lishment of a fair and reasona+le price
– Creation of an enforcea+le agreement
– Management of the relationship

Supply Management utili7es Strategic Sourcing
1-4
Strategic Sourcing

Strategic sourcing is understanding the mar!ets
you8re purchasing from inside and out9

9and learning from your o:n organi7ation and your
suppliers8 organi7ational processes,9

9:or!ing as a mediator +et:een suppliers and your
organi7ation,9

9and capturing information and using it to impro%e
relationships.

Strategic sourcing re*uires t:o#:ay continuous
impro%ement process :or! from each organi7ation
1-5
our Principles of Strategic Sourcing
). Define the total %alue of the relationship +et:een
purchaser and suppler,
,. De%elop solutions +ased on a deep understanding
of the supplier8s economics and +usiness dynamics,
-. ;se differentiated purchasing tactics in order to
optimi7e the economic relationship for +oth
purchaser and suppliers, and
.. Im+ed the re*uired changes in the organi7ation so
the purchaser achie%es not only a near#term
measura+le performance impro%ement +ut also the
a+ility to continuously impro%e
1-6
Increasing Importance of Purchased
Materials

"he i%e Ms of Business2 Machines, Manpo:er,
Material, Money, Management

Materials costs ha%e increased
– 5s a percentage of the cost of goods sold

La+or costs ha%e decreased

Machine po:er has replaced much of human 'and horse(
la+or o%er the last )/< years

"he result=

Materials costs are increasingly the focus of management
1-7
Supply Management and the Bottom Line

Purchased items account for a large
percentage of the cost of goods sold.

>utsourcing allo:s firms to focus on
their core competencies.

>rgani7ations outsource :hen they decide
to purchase something they had +een
ma!ing in#house.

5 dollar sa%ed in materials cost has a
larger impact than a dollar increase in
profit
1-8
Supply Management’s Impact on ?et
Income and the Bottom Line
Increased Sales2
• aster to Mar!et
• Impro%ed @uality
• Pricing le&i+ility
• Inno%ation
• 1nhanced Customer Satisfaction
• Supplier of Choice
• Customer ulfillment le&i+ility
• Shorter Cycle and Lead "imes
Lo:er "otal Cost2
• 5c*uisition Cost
• Processing Cost
• @uality Cost
• Do:ntime Cost
• $is! Cost
• Cycle "ime Cost
• Con%ersion Cost
• ?on#%alue 5dded Cost
• Supply Chain Cost
• Post >:nership Cost
igure )#,
1-9
Return on
Investments
10.0%
Total assets
$4,000,000
Sales
$5,000,000
Divided by
Profit
margin
8%
sset turnover
rate
1.!5
Multiply
"as#
$$00,000
%%ount
re%eiva&le
$$00,000
Inventories
$500,000

s
s
e
t
s
'a&or
$(00,000
)aterials
$!,$00,000
*ver#ea+
$800,000
*
,
e
r
a
t
i
n
g

%
o
s
t

e
l
e
m
e
n
t
s
-$515,000.
-$$,/85,000. -$!,185,000.
-10.$%.
-1.!/.
-$$,0(5,000.
-$1,0(5,000.
-$4(5,000.
-1$.0%.
1#at if 2e
+e%rease
materials %ost
&3 5%4
-or $115,000.
Sales
$5,000,000
5et in%ome
$400,000
Divided by
6i7e+ assets
$!,000,000
"urrent assets
$1,100,000
Plus
*t#er %osts
$800,000
Sales
$5,000,000
"ost of
8oo+s Sol+
$$,800,000
Minu
s
Plus
Supply Management and $eturn on
In%estment
igure )#-
1-10

"he Impact on $>I of $educing Materials
Costs %s. Increasing Sales

If the same profit increase :ere to +e
generated +y increasing sales, :hat
sales increase :ould +e re*uired=

5t the e&isting AB profit margin, the
follo:ing calculation pro%ides the
ans:er9

Profit increase C ne: sales D .<A

E))/,<<< C ne: sales D .<A

ne: sales C E),.-F,/<<
1-11

"he Impact on $>I of $educing Materials
Costs %s. Increasing Sales

therefore9..

'E),.-F,/<< G E/,<<<,<<<( D )<< C
,A.AB

or a sales increase of ,A.AB is re*uired
to match the profit increase generated
+y a /B reduction in materials cost
1-12
5 Definition of Supply Chain
Management

Supply Chain Management is a set of approaches utili7ed
to efficiently integrate suppliers, manufacturers,
:arehouses, and stores,9

9so that merchandise is produced and distri+uted at the
right *uantities, to the right locations, and at the right time,
at the right price, at the right *uality

9in order to minimi7e system :ide costs

9:hile satisfying ser%ice le%el re*uirements.
1-13
Source2 Simchi#Le%i, Kamins!y, and Simchi#Le%i, Designing
and Managing the Supply Chain, Ir:in, McHra:#Iill, ,<<<.
"he Supply Chain
)ot#er
9art#
*riginal
9:ui,ment
)anufa%turers
-*9).
97tra%tors
)iners
;arvesters
"onverters
-su,,liers.
igure )#.
Materials and Service
Information/Funds/Relationships
1-14
"he 4alue Chain
)ot#er
9art#
*riginal
9:ui,ment
)anufa%turers
-*9).
97tra%tors
)iners
;arvesters
"onverters
-su,,liers.
)ar<eters
=istri&utor
s
9n+ "ustomer
-t#e sour%e
of fun+s.
igure )#/
Materials and Service
Information/Funds/Relationships
1-15
"he Supply and 4alue ?et:or!s

le&i+le %irtual systems lin!ed +y
communication systems and alliances.

Simultaneous acti%ities.

ocus is on the ultimate customer to deli%er2

4alue creation through inno%ation

4alue deli%ery through order fulfillment

4alue maintenance through after sales ser%ice
1-16
Implementing Strategic SCM
Strategic Supply Management Institute and The Warren Company
Copyright 2006
12
Pro-Active To Customer Responsive to Customer Reactive to Customer Isolated from Customer
Time Focus
Performance
Metrics
Speed & Integration,
Design Supply Base
Integrated Supply Strategy
Process Innovation,
Develop Reuirements,
!ear Defect "ree Supply
Suee#e t$e %endor
Internet Auctions !ot$ing
Basis of
Competitive
Advantage
Performance
Metrics
Timeliness & &fficiency
'o( Component)*nit Cost,
+n Time Delivery
Speed, &ffectiveness, ,onitor
Supply &nvironment
Coordination & Sync$ronicity
Interconnectedness
Relations$ips & Trust
Coordination & Cost, Develop
Suppliers
T$roug$-Put
-lo.al Impact
'everage Si#e of Buyer
Po(er Dynamics Bet(een Buyer
& Seller Do t$e /o.
,oderate Integration Internal &
&0ternal Integration1 Supply ,
R&D, 'ogistics, +perations,
&ngineering, ,ar2eting,
Customer Service
Partial Internal Integration
Procurement, 'ogistics,
+perations, &ngineering 'o( Internal Integration
Procurement & 'ogistics
!o Internal Integration
Purc$asing
Integration Level &
Functional Elements
Revenue & Bottom 'ine Impacts
Increase S$are 3older %alue
Transform Innovation into %alue Improve Bottom 'ine
Some Consideration of Revenue
Impacts
Improve Bottom 'ine
!o Consideration of Revenue
Impacts +ver$ead-Cost Center
Financial Impact
Innovation
Top & Bottom 'ine
Internal Integration
4uality,
/ust In Time
Total Cost of +(ners$ip
Purc$ase Price
Timely Availa.ility,
Convenience
Value Driver
! "trategic
"uppl# C$ain Mgmt
%! Proactive
"uppl# Management
&! Transactional
Mec$anical
'! (eactive
Clerical
Burt Burt- -Lynch Supply Chain Evolution Model Lynch Supply Chain Evolution Model
)!* +orld Class !* !) %!* %!) &!* &!) '!* '!) (ating
Transactional & Colla.orative Transactional, Colla.orative, &
Alliance
Adversarial & Transactional
Personal
"upplier
(elations$ips
e-Commerce
5S$ould Cost6 Analysis
T$omas Directory,
P$one Boo2
Rolode0
*nderstand Industries, Supply
Base
*nderstand Suppliers ,no-ledge
VA(IABLE
Building to +orld Class
Note: Some Elements of an Earlier Stage are Carried as a Foundation into the next stage, while other elements may be discarded
Copyright D.N.Burt & R.P.Lynch
Pro-Active as ,ar2et
Differentiator for Customer Considered As Part of TC+ Added Cost "actor !ot Considered
Environmental
1-17
Concluding $emar!s

Purchasing is the foundation of Supply
Management and a +asic acti%ity common to all
organi7ations.

1ffecti%e Supply Management has an
o%er:helming impact on the firm’s +ottom line
gi%ing organi7ations a competiti%e edge.

Supply Management has +ecome the C1>’s
strategic :eapon

Supply Management pro%ides tremendous
career opportunities
1-18
actors affecting organi7ational structure

Classification of responsi+ilities and acti%ities

Management

BuyingGSupply Management

Contract and $elationship Management

Strategic Planning and $esearch 3or!

ollo:#up and 1&pediting

Clerical 5cti%ities
actors affecting organi7ational structure
Operational ctivities Strate!ic ctivities
"lacin! "urchase Orders Supplier #evelopment
Responsi$ilities
Mana!in! Contracts/Blan%et
Order Releases
Coordinatin! the
"rocurement System
E&peditin! In$ound Orders #evelopin! Lon!-'erm
Contracts
Continuity of Supply to
"roduction Lines
#evelopin! and Inte!ratin!
Supply Strate!y
Mana!in! Supplier
Relationships
Mana!in! Ris%s in Supply
Chain
'ransactionally Focused
ctivities
Strate!ically Focused
ctivities
>rgani7ational 5uthority
• Centrali7ed 5uthority J decision ma!ing
responsi+ility in hands of one indi%idual or
one location.
• Decentrali7ation of Purchasing 5uthority#
decision ma!ing responsi+ility delegated
to cross functional areas or di%isions.
Benefits of Centrali7ed 5uthority
• $eduction of duplication of effort
• Le%eraging of %olume purchases
• Consolidation of re*uirements
• "ransportation sa%ings
• Indi%idual speciali7ation
• $eduction of suppliers’ costs
• Impro%ed in%entory control
• Lo:er administration costs
• Centrali7ed control
• $eduction in costs of ser%ices
Benefits of Decentrali7ation
• Specialty +uyers can e%ol%e
• aster response time for multiple locations
• Better understanding of location’s
re*uirements.
• More efficient +uying of lo: dollar, odd
+uys.
>rgani7ational Structures
• "he Supply Chain Management Structure
– Denia
• >rgani7ing :ith Cross#unctional "eams
– $e%ie: of 5ppendi&
Concluding $emar!s
• 5ppropriate organi7ational structure is
critical to effecti%e supply chain
management.
Key Concepts
• 5 "ransformation in $elationships
• "ypes of Buyer#Supplier $elationships
– "ransactional $elationships
– Colla+orati%e and 5lliance $elationships
– Colla+orati%e $elationships
– Supply 5lliances
• "he Supplier8s Perspecti%e
• De%eloping and Managing Colla+orati%e and
5lliance $elationships
4-26
Key Concepts

Situations 3herein 5lliances may not +e
5ppropriate

5 Portfolio 5pproach

?e: S!ills and 5ttitudes $e*uired

1#Commerce and the K$ightL "ype of
$elationship

$elationships of the uture
4-27
5 "ransformation in $elationships

"he transformation from reacti%e and mechanical
purchasing to proacti%e procurement and on to strategic
Supply Chain Management parallels a similar
transformation in relationships +et:een +uyers and
suppliers

Prior to the )MA<s most purchasing relationships :ere
reacti%e

Interaction +et:een %endor and purchasing resulted in
outcomes :here one’s gain :ould +e the other’s loss
4-28
"hree "ypes of Buyer Supplier
$elationships

"ransactional

Colla+orati%e

5lliance
4-29
Continuum of Bu#er."eller (elations$ips
Continuum of Buyer#Seller $elationships
igure .#)
Communication
Competitive Adv.
Connectedness
Continuous Impr.
Contributions to NPD
Difficulty of Exit
Duration
Expediting
ocus
!evel of Integration
High pot. for problems Systematic approach
Low High
Independence Interdependence
Little A focus
Few Many – ESI
Low ifficult – high impact
Short Long
!eacti"e #roacti"e
#rice $otal cost
Little or none High or total
ctivity/ttri$ute 'ransactional Colla$orative lliance
4-30
Continuum of Bu#er."eller (elations$ips
Continuum of Buyer#Seller $elationships
Number of "uppliers
#pen $oo%s
&uality
'elations
'esources
"ervice
"(ared orecasts
"upply Disruptions
)ec(nology Inflo*s
)ype of Interaction
Many %ne or few
&o 'es
Incoming inspection esign (uality in system
Inward loo)ing *oncern w+well being
Few – low s)ill le"el #rofessional
Minimal ,reatly impro"ed
&o 'es
#ossible -nli)ely
&o 'es
$actical Strategic synergy
ctivity/ttri$ute 'ransactional Colla$orative lliance
igure /#) Continued
4-31
"ransactional $elationships
Characteristics

5n a+sence of concern

>ne of a series of independent deals

Costs, data and forecasts are not shared

Price is the focus of the relationship

5 minimum of purchasing time and energy is
re*uired to esta+lish prices

"ransactional purchases lend themsel%es to e#
procurement
4-32
5d%antages of "ransactional
$elationships

$elati%ely less purchasing time and effort
are re*uired to esta+lish price

Lo:er s!ill le%els of procurement
personnel are re*uired
4-33
Disad%antages of "ransactional
$elationships
• Potential for communication difficulties
• 1&pediting and monitoring of incoming *uality
• Infle&i+le :hen fle&i+ility may +e re*uired
• "end to result in more deli%ery pro+lems
• @uality :ill +e only as good as re*uired
• Suppliers pro%ide the minimum ser%ice re*uired
• Less effecti%e performance +y suppliers
• Customers are su+Nect to more supply disruptions
• Supplier is not moti%ated to in%est time and energy de%elopment
of +uyer’s products
4-34
Colla+orati%e and 5lliance $elationships

KF0B of C1>’s thin! e&ternal colla+oration
:ith +usiness partners and customers is
!ey to inno%ationL

Colla+orati%e and alliance relationships
tend to result in lo:er total costs and
impro%e performance of the supply chain
4-35
"hree Success actors

$esearchers Stanley and Pearson found
that the three most important factors in a
successful +uyer#supplier relationship are2

')( t:o#:ay communication,

',( the supplier8s responsi%eness to supply
management8s needs, and

'-( clear product specifications
4-36
Colla+orati%e $elationships

Colla+orati%e relationships tend to foster9.
– Longer term contracts
– $eduction of ris! for suppliers
– $educing total costs
– Impro%ement of processes
– Impro%ement of products
– Increased in%estment in $ O D
– Increased in%estment in training
– Increased in%estment in e*uipment
– Better focus on customer needs
4-37
Benefits of Supply 5lliances

Lo:er total costs.

$educed time to mar!et

Impro%ed *uality

Impro%ed technology flo: from suppliers

Impro%ed continuity of supply
4-38
5lliance 5ttri+utes

Continuous impro%ement

Interdependence and commitment.

5tmosphere of cooperation

Informal interpersonal connections

Internal infrastructures to enhance learning

>penness in all areas of the relationship

5 li%ing system
4-39
5lliance 5ttri+utes Continued

5 shared %ision of the future

1thics ta!e precedence o%er e&pediency

5dapta+le in the face of change

Design of e&periments and supplier certification

3in#3in negotiations

1&ecuti%e le%el commitment

5%oid terms that could pro%e destructi%e
4-40
Strategic 1lements of a $elationship

Is one supplier head and shoulders a+o%e the rest in
terms of the %alue it pro%idesP including price, inno%ation,
a+ility to adapt to changing situations, capacity to :or!
:ith your team, tas! Noint ris!s, etc=

5re some suppliers KstrategicL to your +usiness=

3ould your company +enefit greatly if the supplier :ere
more Kintegrally connectedL :ith your company=

Do your customers re*uire high degrees of fle&i+ility and
speed of responsi%eness=
4-41
"he Supplier’s Perspecti%e

Supplier’s :ant good customers

Se%eral issues affect their assessment,
among them are2

Cash lo:

>penness and 5pproacha+ility

5%aila+ility

Professionalism
4-42
@uestions to +e 5ddressed Before
Proceeding

Is there a danger that the supplier may act in an opportunistic
manner o%er time=

Do electronic systems allo: for optimum communication and
sharing of information=
• Is the potential strategic alliance a+le to stay current in the
industry=
• 5re +oth the organi7ations :illing to !eep attention focused on
the Noint customer=

5re there other suppliers :orth in%estigating +efore committing
to a strategic alliance=

Ias the supply manager +een thoroughly trained=
4-43
@uestions to +e 5ddressed Before
Proceeding

Is the organi7ation proud to +e aligned and associated :ith the
supplier=

Is the organi7ation comforta+le :ith the le%el of ris! associated
:ith reducing the supply +ase=
• 5re +oth supplier and +uyer aligned in :hat their ultimate
customer considers to +e %alua+le=
• If there is su+stantial ris! for the supplier to de%elop ne:
technologies, products, processes, or ser%ice support=

5re +oth supplier and +uyer aligned in their respecti%e %isions=

5re there sufficient operational points of interaction=
4-44
Situations 3herein 5lliances may not +e
5ppropriate

Sta+ility
– Price 4olatility
– Demand 4olatility
– Iigh S:itching Li!elihood :ith Iigh S:itching Costs

Capa+ility
– ?o PartnershipG5lliance#Capa+le Supplier for the Item
– ?o PartnershipG5lliance#Capa+le Supplier in the Heographic 5rea
– $apid "echnological Change
– Mismatch of Cloc! Speed
4-45
Situations 3herein 5lliances may not +e
5ppropriate

Competition

?on#Competiti%e Mar!et

Supplier Dependency Creation
– ?eglected 5reas

Suppliers See!ing to $educe Competition

Benefits

?o le%erage from Partnership

?o Iard Sa%ings from Partnership

Internal Buy#In

?o Internal Customer Buy#In
4-46
"he Portfolio 5pproach

Successful supply chain management re*uires
the effecti%e and efficient management of a
portfolio of relationships

"hree en%ironmental factors to consider2

')( the product e&changed and its technology,

',( the competiti%e conditions in the upstream mar!et,
and

'-( the capa+ilities of the suppliers a%aila+le
4-47
?e: S!ills and 5ttitudes $e*uired

De%eloping and managing colla+orati%e and
alliance relationships re*uire supply
professionals that possess the follo:ing s!ills
and attitudes2

$ecogni7e the +enefits of colla+oration

5+ility to identify, o+tain and use data

5+le to :or! in chaos and uncertainty

5gile, fle&i+le, and highly adapti%e
4-48
1#Commerce and the K$ightL "ype of
$elationship

QIo: does B,B eCommerce affect our
selection of the 8right8 type of relationship=K

Selection must +e a function of the
re*uirement, not of the InternetR

B,B eCommerce is an ena+ler
4-49
Key Concepts
• "he Strategic Sourcing Plan
• Disco%ering Potential Suppliers
• 1%aluating Potential Suppliers
• Selecting Suppliers
– Bidding 4ersus ?egotiation
– $e%erse 5uctions
– ":o#Step BiddingG?egotiation
– "he Solicitation
– 3eighted#actor 5nalysis
– $esponsi+ility for Source Selection
• De%eloping Suppliers
• Managing Suppliers
Key Concepts

5dditional Strategic Issues

1arly Supplier In%ol%ement
– Supply Base $eduction
– Single 4ersus Multiple Sourcing
– Share of Supplier’s Capacity
– Local, ?ational and International Sourcing
– Manufacturer or Distri+utor
– KHreenL Supply Management
– Minority# 5nd 3omen#>:ned Business 1nterprises
– 1thical Considerations
– $eciprocity
"he Strategic Sourcing Plan

3orld class Supply Management re*uires
supply management to de%elop a strategic
sourcing plan that details ho: supply
management :ill disco%er, e%aluate,
select, de%elop and manage a %ia+le
supplier +ase
Strategic Sourcing Plan Stages
igure ))#)
Disco%ery

Supplier 3e+ Sites

Supplier Information
iles

Supplier Catalogs

"rade $egisters O
Directories

"rade Sournals

Phone Directories

iling of Mailing Pieces

Sales Personnel

"rade Sho:s

Company Personnel

>ther Supply
Management
Departments

Professional
>rgani7ations
1%aluating Potential Suppliers
• Supplier Sur%eys
• inancial Condition 5nalysis
• "hird Party 1%aluators
• 1%aluation Conference
• acility 4isits
• @uality Capa+ility 5nalysis
• Capacity Capa+ility 5nalysis
• Management Capa+ility 5nalysis
• Ser%ice Capa+ility 5nalysis
• le&i+ility Capa+ility 5nalysis
• Information "echnology Capa+ility 5nalysis
Selecting Suppliers

Bidding 4ersus ?egotiation

$e%erse 5uctions

":o#Step BiddingG?egotiation

"he Solicitation

3eighted#actor 5nalysis

$esponsi+ility for Source Selection
Bidding %ersus ?egotiation

e: topics generate more passionate
discussions than +idding %ersus
negotiation

"he selection of +idding or negotiation
should +e decided +y using o+Necti%e
criteria, a total cost perspecti%e and sound
supply management logic
Prere*uisites to Bidding

Dollar %alue must +e large

Specifications must +e clear

Mar!et must consist of an ade*uate num+er of
sellers

Sellers must +e *ualified and :ant the
contract

"ime a%aila+le must +e sufficient
Conditions Demanding ?egotiation

Impossi+le to estimate costs :ith a high
degree of certainty

Price is not the only important %aria+le

Purchasing firm anticipates a need to ma!e
changes in the specification

Special tooling of setup costs are maNor
factors
$e%erse 5uctions
In contrast to competiti%e +idding, re%erse auctions
produce Kreal#timeL interaction.
"hough effecti%e for achie%ing cost sa%ings, re%erse
auctions are not appropriate for all situations.
$e%erse +id process can ha%e an ad%erse affect on
long#term relationships.
":o#Step BiddingG?egotiation

;sed in situations :here inade*uate
specifications preclude the initial use of
traditional competiti%e +idding

"he t:o steps are2

Step )2 "echnical Proposals
– IBs for Step , are sent only to those sellers :ho su+mitted
accepta+le technical proposals

Step ,2 Price Bidding
"he Solicitation

IB

$P

Item description

Info on *uantities

Deli%ery schedules

Special terms and conditions

Standard terms and conditions
3eighted actor 5nalysis

Steps to de%eloping

De%elop factors to ser%e as criteria

De%elop su+#factors or performance factors

De%elop a scoring factor

Score or e%aluate the supplier
De%eloping Suppliers

De%elopment of suppliers is one of the greatest
untapped frontiers in supply chain management

1%en suppliers recogni7ed as the K+est of the +estL
re*uire in%estment on the part of the +uying firm to
reali7e the full +enefit of the colla+orati%e relationship

"his important topic is addressed in detail in the
chapter on Supplier De%elopment
Managing Suppliers

Managers must ensure the suppliers perform as re*uired.

Suppliers must meet the firm’s long#term needs.

If suppliers are unli!ely to meet future re*uirements the
firm may2
– 5ssist :ith financing G technological assistance.
– De%elop ne: sources.
– Be re*uired to de%elop the capa+ility internally.
5dditional Strategic Issues

1arly Supplier In%ol%ement
• Supply Base $eduction

Single 4ersus Multiple Sourcing

Share of Supplier’s Capacity
• Local, ?ational and International Sourcing

Manufacturer or Distri+utor
• KHreenL Supply Management

Minority# 5nd 3omen#>:ned Business 1nterprises
• 1thical Considerations

$eciprocity
1arly Supplier In%ol%ement

1arly supplier in%ol%ement '1SI( is an
approach in supply management to +ring
the e&pertise and colla+orati%e synergy of
suppliers into the design process

1SI see!s to find K:in#:inL opportunities

"oday, early supplier in%ol%ement '1SI( is
an accepted :ay of life at many proacti%e
firms and a re*uirement for 3CSM
1SI >pportunities

Materials

Ser%ices

"echnology

Specifications and
"olerances

Standards

>rder @uantities

Lead "ime

Processes

Pac!aging

"ransportation

$edesigns

5ssem+ly Changes

Design Cycle "ime

In%entory $eductions
$easons for ;tili7ing 1SI

Het supplier inputs +efore the design is
fro7en

Capitali7e on the latest technology

Sa%e time since design cycles are getting
shorter

Let the supplier !no: that it is part of the
team
Supply Base $eduction

Supply +ase reduction is achie%ed through +oth reducing
%ariety and increasing consolidation

":o +enefits of supply +ase reduction cited +y Sohn Deere
are2
– increased le%erage :ith suppliers
– +etter focus and supplier integration in product de%elopment

Increased le%erage is also due to the increased in%ol%ement
:ith the suppliers :hich +uilds good:ill and trust
Considerations for Single Sourcing
• Lo:er total cost results from higher %olume
• @uality considerations dictate
• Buyer o+tains more influence :ith the supplier
• Lo:er costs to source, process, e&pedite, inspect
• Sust#in#time re*uirements
• Significantly lo:er freight costs may result
• Special tooling is re*uired
• "otal system in%entory :ill +e reduced
• Supplier :ill ha%e an impro%ed commitment
• Impro%ed interdependency and ris! sharing result
• "ime to mar!et is critical
Dual Sourcing ;sing the KF<#-<L
5pproach

F< percent of the %olume is a:arded to one
supplier

-< percent to a second supplier

1conomies of scale are o+tained from the
K+ig supplierL

"he Klittle supplierL pro%ides competition

3hen the K+ig supplierL fails to perform the
percentages may +e re%ersed +y the +uyer
Considerations for Multiple Sourcing

Protect the +uyer during +ad times

Maintain competition

Pro%ide a +ac!#up source

Meet local content re*uirements

Meet customer’s %olume re*uirements

3hen the customer is a small player in the mar!et for a
specific item

5%oid complacency on the part of a supplier

3hen the technology path is uncertain

Suppliers tend to KleapfrogL in technology
Share of Supplier’s Capacity

Many firms try to not e&ceed more than )/ to ,/
percent of any one supplier’s capacity

"his issue +ecame all too real in the early
,<<<s

Many companies cancelled orders that had long
supplier lead times, :hich resulted in suppliers
+eing caught :ith, in some cases, hundreds of
millions of dollars of :or!#in#process
Local, ?ational and International
Sourcing

"he lines +et:een local, national, and international sourcing
ha%e +ecome +lurred in the last -< years

Local source
– irm’s head*uarters and all facilities are located in the city or region
:here the materials or ser%ices :ill +e used

?ational source
– "he source is head*uartered :ithin the country and has facilities in
multiple regions throughout the country

International source
– irm is head*uartered outside of the +uying firm’s country, +ut this
does not define the location of operations
Local Buying 5d%antages

Closer cooperation +et:een +uyer and seller is possi+le

Deli%ery dates are more certain

Lo:er prices can result from consolidated transportation
and insurance

Shorter lead times reduce in%entory

$ush orders are filled faster

Disputes are usually more easily resol%ed

Implied social responsi+ilities to the community are
fulfilled
?ational Buying 5d%antages

1conomies of scale

Superior technical assistance

Better handling of fluctuating demand

Shortages are less li!ely
Manufacturer or Distri+utor

Potential Benefits of a Distri+utor o%er
Buying Direct from the Manufacturer

1conomy of scale

$eduction of orders

$eduction of paper:or!

Special ser%ices

"echnical ad%ice

Credit
KHreenL Supply Management

$ecycled materials

1n%ironmental issues

Lia+ility issues
Minority# 5nd 3omen#>:ned Business
1nterprises

Many forces moti%ate a +uying firm to ensure that M3B1
+usinesses recei%e a share of the firm’s +usiness, such as2
– ederal and state legislation
– Set#aside *uotas in go%ernment appropriations
– 5ctions of regulatory +odies
– irm’s Kcorporate social consciousnessL
– Customer +ase includes M3B1 +usinesses and their employees
– Bottom#line profita+ility
– Hood +usiness sense
1thical Considerations

Conflicts of interest

1&ists :hen supply managers must di%ide
their loyalty +et:een the firm :hich employs
them and another firm

Such conflicts al:ays should +e a%oided in all
source selection decisions
Concluding $emar!s

"he increase in long#term colla+orati%e
relationships is highlighting the need to de%elop
strategic sourcing plans

"he plan aids in source selection +y detailing ho:
suppliers :ill +e disco%ered, e%aluated, selected,
de%eloped and managed

"he plan should +e de%eloped in a colla+orati%e
en%ironment that includes all rele%ant functional
area representati%es and supply chain mem+ers
gen+a
Intro+u%tion to 8lo&al Sour%ing
)inimi>ing Ris< t#roug# t#e Strategi% Sour%ing Pro%ess
1. nal3>e S,en+
!. Profile "ategor3
$. =evelo, Strateg3
4. =evelo, eR6? or )anage =eman+
5. "ontra%t 2it# Su,,liers
/. )anage Su,,liers
(. Im,rove Su,,liers
"ase Stu+ies
"on%lusions
[email protected]
Hlo+al Strategic Sourcing Process
Asing t#is ,ro%ess 2ill minimi>e ris<
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Manage
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Suppliers
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Strategy
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Spend
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Category
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Manage
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Supplier1s 2
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Suppliers
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Strategy
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Supplier1s 2
Profile
Category
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Spend $y
Re!ion
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+orth merica
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South merica
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a
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+um$er of Business 2nits Buyin! 3iven Cate!ory
Anal#/e "pend B# Mont$
• 80% of Soft2are s,en+
goes t#roug# 1(
su,,liers
• !0% of Soft2are s,en+
goes t#roug# 140
su,,liers
Month
!001
!000
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$500,000
$1,000,000
$1,500,000
$!,000,000
$!,500,000
$$,000,000
$$,500,000
Dan 6e& )ar ,r )a3Dun Dul ugSe,t*%t 5ov=e%
Cate!ory Spend By Month
Month
!00(
!00/
$C
$500,000
$1,000,000
$1,500,000
$!,000,000
$!,500,000
$$,000,000
$$,500,000
Dan 6e&)ar ,r )a3Dun Dul ugSe,t*%t 5ov=e%
$C
Dan 6e& )ar ,r )a3Dun Dul ugSe,t*%t 5ov=e%
Supplier +ame nnual Spend * of 'otal
"I $4,$08,0/0 !4%
SP $4,$00,(04 !4%
Be7 Soft2are In%. $1,0$5,000 /%
Soft,oint $/!1,5/5 $%
Eets $510,4$$ $%
%tual "or,. $40/,054 !%
Rational Soft2are $$(!,000 !%
*ra%le $$41,8/1 !%
"ross2orl+s $$05,(/! !%
meri%a *nline In%. $$05,!0( !%
SP $!00,(4( !%
*t#er $!/(,144 1%
S3n%#ronous In%. $!50,(0! 1%
)er%#ant $!41,$41 1%
"onne%te+ Resour%es $!1!,84! 1%
)%allister $10/,550 1%
"ontinental Resour%es $1((,5(! 1%
1itness S3stems In%. $101,$(8 1%
140 Other Suppliers $$,044,(0( !1%
3rand 'otal .45)//5))4 0 .//*
Europe
nal3>e S,en+
S,en+ s#oul+ &e anal3>e+ &3 region, su,,lier, +ivision, ,lant, %ategor3 an+ an3 ot#er
sli%ing t#at 2ill ,rovi+e a goo+ anal3sis of t#e +ata
*&servations Potential Solution Ris< t#at is
minimi>e+
Too man3 su,,liers for a small
amount of s,en+
'everage s,en+ 2it# fe2er su,,liers Su,,l3F6inan%ial
'argest ,er%entage of s,en+ in
Sout# meri%a
Regionali>e t#e &u3 Trans,ortation
S,en+ tren+ is +ifferent from t#e
,revious 3ear
Revie2 s,en+ against a%tual an+ fore%ast
sales an+ +etermine if t#e s%#e+ule %oul+
&e%ome more %onsistent
Inventor3
ll &usiness units &u3 a %ategor3
at a lo%al level
"entrali>e t#e &u3 Su,,l3
Pur%#ase at +ifferent levels of t#e
su,,l3 %#ain -ie motors an+
2in+ings.
*utsour%e t#e 2in+ings )a<e vs. Bu3
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
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()pplier
Profile "ategor3
Su,,l3 )ar<et nal3sis
Ge3 glo&al su,,liers
)ar<et tren+s
Su,,lier %a,a&ilities
Regional e%onomi%s
8lo&al e%onomi%s
Pro+u%t tren+s
"om,etitive nal3sis
"ategor3 "#ara%teristi%s
S,e%ifi%ations
6un%tionalit3
Aser re:uirements
"riti%alit3 to &usiness
6uture ,ro+u%t tren+s
S,en+ nal3sis
S,en+ &3 ,artF%ategor3
S,en+ &3 region
S,en+ &3 su,,lier
S,en+ &3 &usiness unit
S,en+ &3 mont#F3ear
"ost +rivers
Internal %osts
Su,,lier %osts
9%onomi% levers
9ngineering of ,ro+u%t
Performan%e %riteria
"ategor3 Profile

"olla&oration 2it# engineering

An+erstan+ all %ost elements

)at%#ing s,e%s to %a,a&ilit3

Rig#tCsour%e &ase+ on %riti%alit3

"#e%<ing finan%ial status

Ta<ing a+vantage of glo&al
net2or< %om,le7it3

Re+u%e un%ertaint3

Pre,are for une7,e%te+
R
i
s
<
R
i
s
<
Much analysis !oes into the
cate!ory profile in order to
ta%e ris% out of the process
R
i
s
<
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
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()pplier
De%elop Strategy
Routine

)an3 e7isting alternate ,ro+u%ts an+
servi%es

)an3 sour%es

'o2 value

Small in+ivi+ual transa%tions

Hn3oneI %oul+ &u3 it

Ans,e%ifie+ items for ever3+a3 use
Levera!e

;ig#Ce7,en+iture area

)an3 e7isting alternate ,ro+u%ts an+
servi%es

)an3 :ualifie+ su,,l3 sour%es

8oo+s an+ servi%es are rea+il3
availa&le
Strate!ic

Strategi% to ,rofita&ilit3 an+
o,erations

6e2 :ualifie+ su,,l3 sour%es

'arge e7,en+itures

=esign to :ualit3 %riti%al

"om,le7 s,e%ifi%ations
Bottlenec%

Eer3 %om,le7 s,e%ifi%ations re:uiring
%om,le7 manufa%turing or
servi%ing

6e2 alternate ,ro+u%ts availa&le

6e2 :ualifie+ sour%es of su,,l3

)a3 #ave a &ig im,a%t on ongoing
o,erations or maintenan%e

5e2 te%#nolog3 involve+ in ,rovision
of t#e ,ro+u%t or servi%e
B
u
s
i
n
e
s
s

I
m
p
a
c
t
Supply Market Complexity
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
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De%elop Strategy
Business
Impact

./pe"$it)re level

-#pa%t o" pro$)%t
$iffere"tiatio"

-#pa%t o" lea$er*'ip
te%'"ology

Fail)re i#pa%t
Lo6
7i!h
7i!h Lo6
Levera!e

2se competitive
advanta!e to reduce total
costs

8olume used as
ne!otiation tool

Off shore/+ear Shore
+on-critical

Simplify and streamline
purchasin! process to
achieve efficiency

Reduce 9 of suppliers :
simplify order process

On Shore
Strate!ic

Ensure lon!-term
availa$ility of supply-
potentially ;+ear Shore<

Focus on relationship-
$uildin! and process
inte!ration 6ith supplier
Bottlenec%

Reduce/eliminate
company=s ris% and
e&posure to price
increase/supply ris%

Secure e&istin! sources
of supply5 search !lo$ally
for su$stitutes5etc> ;Off
shore/ +ear Shore<
Su,,l3 )ar<et "om,le7it3

N)#0er of optio"*

1)yer leverage

2e%'"i%al %o#ple/ity
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
eRF? path Mana!e #emand path
• Business Interruption Ris%s
• "onsi+eration s#oul+ &e given as to t#e %onse:uen%e of an3 &usiness
interru,tion 2#en sele%ting t#e num&er an+ lo%ation of su,,liers
• )ission %riti%al items s#oul+ #ave a su,,l3 &a%<Cu, or ris< mitigation ,lan
• Forei!n Currency E&posure
• Sour%ing generall3 s#oul+ &e in t#e %urren%3 of t#e re%eiving %ountr3 &ut it
ma3 &e &enefi%ial to transfer t#at ris< to t#e &u3ing %om,an3 if t#e3 #ave
su,erior #e+ging %osts
• 'a& E&posure
• ll sour%ing alternatives s#oul+ %onsi+er unre%overa&le ta7 %osts
• ll strategies +evelo,e+ s#oul+ %om,re#en+ t#e afterCta7 ris<
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
• Financial Ris%

Stru%tures involving ,rogress ,a3ments, re&ates or ot#er finan%ial
arrangements nee+ to &e assesse+ for relative ris< %om,are+ to
straig#t &u3s
• %%ounting treatments of t#ese stru%tures s#oul+ &e a,,rove+ &3
finan%e &efore &usiness is %ontra%te+

;e+gingFfor2ar+ &u3ing strategies %an mitigate ris<, es,e%iall3
t#ose t#at are su,,l3C%onstraine+
• Before sele%ting a sour%ing strateg3, %onsi+eration s#oul+ &e given
as to t#e relative %on%entration t#at t#is &usiness 2ill ,rovi+e to t#e
su,,l3 &ase

#eav3 %on%entration of &usiness 2it# a single su,,lier 2ill s#ift
ris< to2ar+ +isru,tion in t#e event of finan%ial +istress
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
=evelo, Strateg3
• 'echnical Ris%
• =ivision of res,onsi&ilities ma3 &e re:uire+ in or+er to ,rote%t te%#nologies
2#ere outsour%ing of #ig#erClevel te%#nolog3 ,ro+u%ts or servi%es is a
&usiness alternative
• 5o single su,,lier s#oul+ #ave <no2le+ge of all as,e%ts of t#e te%#nolog3 to
avoi+ %loning or ina,,ro,riate use or +is%losure
• Te%#ni%al o&soles%en%e s#oul+ &e %onsi+ere+ in +etermining %ontra%t si>e
an+ +uration of %ertain evolving te%#nologies
• Investment E&posure Options
• "onsi+eration s#oul+ &e given to #o2 volume sensitive t#e su,,lierJs %ost
2ill &e as a result of t#e sour%ing re:uirement.
• )ore %a,italCintensive &usinesses ma3 re:uire longerCterm agreements to
get t#e &est ,ri%e.
• ris< F&enefit anal3sis of volume guarantees s#oul+ &e assesse+ to +evelo,
,otential o,tions
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
=evelo, Strateg3
• Le!al Ris%
• 1#en anal3>ing t#e &usiness stru%ture an+ sour%ing o,tions
%onsi+eration s#oul+ &e given as to re:uire+ in+emnifi%ations from
t#e su,,lier for t#e ,ro+u%t or servi%e ,erforme+.
• To t#e e7tent t#at t#is re:uirement ma3 #ave a material effe%t on
,ri%e, ris< s#ifting or ris< mitigating alternatives s#oul+ &e +evelo,e+.

• n anal3sis of t#e su,,liers a&ilit3 to stan+ &e#in+ t#e in+emnit3
s#oul+ &e %onsi+ere+. re:uirement for insuran%e ma3 &e ,art of
t#e anal3sis.
• "are s#oul+ &e ta<en in t#e %ontra%ting ,#ase to &e %ertain t#at t#e
legal entit3 2e are %ontra%ting 2it# is not a s#ell 2it# limite+ assets.
In all %ases ,ossi&le, t#e %ontra%t s#oul+ &e &in+ing on t#e #ig#est
stru%tural level of o2ners#i, of t#e su,,lier.
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
0ith
Supplier1s 2
Manage
Suppliers
e"elop
Strategy
Analy3e
Spend
Impro"e
Supplier1s 2
Profile
Category
Develop
eRFQ /
Negotiate
R
!a"age
De#a"$
Co"tra%t
&it'
()pplier
!a"age
()pplier
Develop
(trategy
+"aly,e
(pe"$
-#prove
()pplier
De%elop Strategy
• Ma%e 8s> Buy Ris%
• Strategies nee+ to %om,re#en+ an3 effe%t t#at future volume
%#anges +ue to gro2t# or ,ro+u%t life %3%le mig#t #ave on t#e
+e%ision to &u3 versus ma<e or vi%e versa.
• T#e &usiness %ase for ma<ing a ,ro+u%t or +evelo,ing selfC
suffi%ien%3 for servi%es ma3 &e%ome stronger at in%reasingl3 #ig#er
volumes.
• T#e ris< of te%#nologi%al o&soles%en%e 2ill effe%t t#e +e%ision to
ma<e or invest in selfCsuffi%ien%3.
• T#e anal3sis of t#e tra+e off &et2een fle7i&ilit3 an+ ,ri%e s#oul+ &e
,art of t#e strateg3 +e%ision.
#rofile
*ategory
e"elop
e!F./
&egotiate
%!
Manage
emand
*ontract
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Supplier1s 2
Manage
Suppliers
e"elop
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• Offshore vs> Onshore Ris%
• Sour%ing strategies nee+ to ta<e into %onsi+eration total %ost of offCs#ore
vs. onCs#ore as 2ell as t#e in#erent ris<s su%# as logisti%s, %ultural
+ifferen%es, et%.
• 1#en %onsi+ering offCs#ore, :ualit3 management s#oul+ &e %onsi+ere+ a
ris< if t#ere is not a ,roa%tive ,lan to manage issues as t#e3 arise
• In or+er to minimi>e ris<, t#ere %oul+ &e a small 2are#ouse ,ut in ,la%e
%lose to t#e &u3ing ,lant, #o2ever, it nee+s to &e manage+ %losel3 to
avoi+ o&soles%en%e +ue to engineering %#anges
• 1#en loo<ing at total %ost as ,art of t#e strateg3 +evelo,ment, it is
im,ortant to %onsi+er t#e Hu,CfrontI %osts su%# as tri,s to t#e su,,liersJ
lo%ations to %om,lete au+its an+ a%tual #istori%al %osts su%# as e7,e+ite+
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If t#e strateg3 +i%tates t#at it is &etter to %reate
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one to +rive

;o2ever, if t#ere is a strategi% su,,lier t#at is %ontinuousl3
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2ill ,ro+u%e less ris<

9a%# 2ill &e revie2e+ as +istin%t ,at#s even t#oug# t#ere
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sour%es
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• +e!otiation
• Gno2 t#e %ulture an+ o&serve all %ommuni%ations
• =evelo, negotiating goals
• An+erstan+ su,,lier o&Ke%tives
• I+entif3 negotiating ris<s an+ tra+eoffs
• =etermine reverse au%tions s#oul+ &e use+
• An+erstan+ &oun+aries an+ leverage ,oints on &ot# si+es
• =evelo, negotiation strateg3 2it# t#e team
• =efine roles for ea%# negotiation team mem&er
('ort 3i*t of
*)pplier*
All Suppliers
(%ree" 1
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9sta&lis# %ost stan+ar+s
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stronger
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"ontinuous im,rovement targets

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)inimi>e %ontra%tual ris<s &3 %reating t#e %ontra%t
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%osts vs. a%tual %osts -in%lu+e all
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[email protected]

Bor% 6ith the supplier to have a lon! term perspective

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"roactively approach chan!in! dynamics of mar%ets

Colla$orate on lon! term strate!ic intent

ssess ne6 technolo!y in the mar%etplace
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"on%lusions
• In or+er to minimi>e ris< 2#en %on+u%ting glo&al sour%ing, a glo&al strategi%
sour%ing ,ro%ess s#oul+ &e rigorousl3 im,lemente+
• T#e strateg3 t#at is sele%te+ for a given %ategor3 2ill gui+e 2#et#er t#e &u3
s#oul+ &e onCs#ore, offCs#ore, or nearCs#ore
• Total %ost nee+s to &e anal3>e+ at t#e &eginning of t#e ,ro%ess to ensure
t#at t#e rig#t +e%isions are &eing ma+e
• Sour%ing of %ontingent su,,liers or logisti%s ,rovi+ers, for2ar+ &u3ing, an+
in%rease+ inventor3 levels are all &eginning ste,s of mitigating ris<
• soli+ ris< management infrastru%ture s#oul+ &e +evelo,e+ in t#e regions in
or+er to :ui%<l3 mitigate an+ &uil+ %ontingen%3 ,lans if a +isru,tion o%%urs
• T#e organi>ation s#oul+ esta&lis# a geogra,#i%all3 +istri&ute+ su,,l3 &ase
t#at meets t#e nee+s of itJs organi>ational goals
?uestions4
T;5G M*A

'ori Sis<, ".P.).
Su,,l3 "#ain Strategist, ;P
'oriSis<N#otmail.%om
"he Minto Principle
Presentation "echni*ues
Factors
- Environment
- Industry
- Customer
- Competitor=s "osition
Implications
- SBO'5 8alue Chain5 :
Financial nalysis
Strate!y
- Mission5 3oals5
[email protected] Initiatives
'actics
- [email protected] : Measures
Bhat=s !oin! onC
Current Situation #esired SituationC
F
I
S
'
Complication/?uestion
“How do we get from current to
desired?”
"roposed Solution 6ith
Supportin! 7ypotheses
“Te way to get tere!”
8alue Opportunities
Focused
Benefits
Measura$le
Pro+lem Definition
)>
7o6 do 6e
!et from current
situation to the
desired situationC
C
->
Is it the ri!ht
solutionC
D>
7o6 do 6e
implement
the solutionC
Solution
(>
Bhat is the $est
alternativeC
lternative .
lternative ,
lternative )
.>#o 6e have a
pro$lem5 and if
so5 ho6 should
6e respondC
,>Bhat should $e
our [email protected]
and strate!yC
C C
E>Be had a solution>
It did not 6or%>
Bhat should 6e
doC
Solution
did not 6or%
C
F "ypes of Pro+lems and @uestions
4alue >pportunities 1&amples

Hro:th

1&panding commercial internet ser%ices to
residential customers :ill ena+le the
telecommunications company to gro: an
additional /B o%er the ne&t , years
'continued(
4alue >pportunities 1&amples
'continued(

1fficiency

Implementing a shared ser%ices
organi7ation :ill reduce total +ac! office
headcount +y ,/ "1’s resulting in
recurring annual sa%ings of E)M
'continued(
4alue >pportunities 1&amples
'continued(

Capital Management

5 shared ser%ices product de%elopment
center for a cash rich electronics firm to
use :ith its suppliers :ill pro%ide the
electronics firm a .<B $>I
Pyramid Communication 3or!sheet
Situation Complication Solution
"nderstanding of te
situation
#ro$lem%s& or issue%s&
emerging from te
current situation
'nswers complication
and gets to teir desired
situation
'his is the conte&t for
framin! the pro$lem
opportunities

8ie6ed from their point
of vie6

Consider internal and
e&ternal factors
Consider the follo6in!
perspectivesF

CEO5 COO5 CFO5 CIO

Board

Customers

Industry/Mar%et

Competition

Re!ulatory Environment

Employees

Financial Resources
and Constraints

Information Systems

Infrastructure

Build your response
from the point of vie6 ofF

"9*

97e%utive
S,onsorFBu3er

#ocument insi!hts and
conclusions

#ocument ctions/
'imeta$le/ 2r!ency

1#at t#e %om,an3
nee+s
to +o an+ 2#en

#ocument 6hat your team
6ould do

"rovide evidence as to 6hy
this the ri!ht alternative
Cost
Reduction
Bor%in! Capital
Efficiency
Fi&ed Capital
Efficiency
Revenue
Enhancement
'a&
MinimiAation
Enterprise
Mar%et 8alue
Time
9
E

F
S
#
a
r
e
#
o
l
+
e
r

E
a
l
u
e
S
A
P
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'
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"
;

I
5

O
"
"
O
R
'
2
+
I
'
G
"ARR95T I5ITITIE9S

total %ost management

8lo&al sour%ing

llian%es

Su,,l3 &ase
stru%ture

*utsour%ing

S#are+ servi%es

Inventor3 management

%%ounts ,a3a&le management

Time to mar<et

Su,,lier innovation

Su,,l3 availa&ilit3
Le"ers of Mar)et 5alue
$iding the Hlo+ali7ation 3a%e
Presented +y
Lori Sis!, CPM
Ie:lett Pac!ard
Sponsored +y 3omen In Leadership Hroup
5genda

Introduction

>%er%ie:

1conomic actors

Internal Impacts

$is! %s. $e:ard

"otal Cost 5nalysis

1na+lers

Conclusions
Introduction
Lori Sis!, C.P.M.
– >%er ,< years of ConsultingGIndustry glo+al supply chain e&perience in automoti%e,
aerospace, and home +uilding industries
– ocus on sa%ing companies money and increase efficiencies in +usiness processes
– Career has +een +uilt from se%eral different companies2 Ma7da, "$3, 1rnst O Toung
Consulting 'Lucas 5erospace, leming oods, Co%isint(, Delphi, IP 'HM, 5merican
1&press(
– MB5 and BSB5 from Bo:ling Hreen State ;ni%ersity
– ISM former Metro Detroit President, 3omen In Leadership Chairperson
– Spea!er for ISM, 5PICS, PanIellenic Logistics and Supply Chain Institute, S5PICS
North America: Primary - Mexico/South America
Secondary - Eastern Europe or Asia
Western Europe: Primary - Eastern Europe
Secondary - Asia or Mexico/South America
Pacific Rim: Primary - Asia
Secondary - Eastern Europe or Mexico/South America
+$ere "$ould +e
"ource0
Regionali>ation
$e%erse Hlo+ali7ation=
• Changes that ha%e occurred o%er the past fe: years
– Less dominant la+or costs
– 5s technology progresses and producti%ity impro%ements dri%e do:n la+or
hours re*uired in many processes
– Increased infrastructure de%elopment
– De%eloping countries in%esting more in education and infrastructure,
companies can no: source confidently in any hemisphere
– ocus on supply chain ris!s
– ?atural disasters, %olatility of fuel prices, performance of supply chain
partners, and financial sta+ility of organi7ations seem to +e the +iggest ris!s
– ?eed for more fle&i+ility
– "here needs to +e a %ery *uic! response to the changing economic conditions
and demand +y the supply chain
• Ia%e created many companies to mo%e to:ards regional or hemispheric sourcing
1conomic actors

inancial

4olatility of commodities such as fuel

La+or costs increasing glo+ally

Logistics costs increasingly important

Language comple&ities

Capacity in shipping industry

"a&es

Heopolitics

ocus on energy
Internal Impacts

Colla+orati%e cross#functional effort to2
– Ma&imi7e supply assurance
– $educe o%erall costs
– Identify hidden costs

$e%ie: of pre%ious sourcing decisions

Material sourcing strategy considerations
– Source in LCC at lo:er cost or source regionally=
• Can LCC supplier utili7e regional logistics hu+ to minimi7e ris!=
• LCC may ha%e / :ee!s in transit or airfreight
• LCC may +e lo:er cost +ut to source regionally may +e less ris! and lo:er logistics costs

"otal Cost 5nalysis
"otal Cost of >:nership

T3,i%al %osts in%lu+e+ in a manufa%turing T"* mo+elL
– =esign "osts
– Ra2 )aterial
– Pur%#ase+ Parts
– =ire%t an+ In+ire%t 'a&or
– 6ringe Benefits
– )a%#ines "osts su%# as +e,re%iation, interest, insuran%e, utilities
– Selling, 8eneral, an+ +ministrative "osts
– Profit
– %:uisition "osts
– =uties, fees, ta7es
– Asage "osts
– 9n+ of 'ife "osts

9nsure t#at 3our T"* mo+el in%lu+es t#e follo2ing ris<sL
– International freig#t
– 'a%< of logisti%s infrastru%ture 2#i%# +rives %ost
– In%rease+ inventor3 %arr3ing %osts
– 'ost salesF%osts +ue to unrelia&le sour%e of su,,l3
– "ost of :ualit3
– ;i++en %osts generate+ &3 ,oor %ommuni%ation an+ management misun+erstan+ings
– ++itional %osts +ue to offCs#oring
"otal Cost 5nalysis
• "a!e another loo!2
– Logistics Costs#
– 1&pedited Shipments
– $epac!ing at :arehouses
– 1%aluate for types of shipment 'container, truc!, rail, L"L, parcel(
– 1%aluate customs fees# fi&ed fee for all shipments :hether a container is a load or a
parcel.
– 5dditional In%entory Dri%en Costs to 1%aluate2
– Price Protection and returns for channel in%entory
– Can too much channel in%entory delay ?e: Product Introductions=
– Material de%aluation and >+solescence Costs
– 1ngineering Change costs :ith / :ee!s of incoming material
– ;nderstand the cost dri%ers
6une 789 :;;8
1
-1.Total "ost of *2ners#i, )o+elsL n
97,lorator3 Stu+3, The Journal of Supply
Chain Management "o,3rig#t O ugust !00!,
&3 t#e Institute of Su,,l3 )anagement, In%.,
Bru%e 8. 6errin, Ri%#ar+ 9. Plan<
$is! %s. $e:ard
Supply Chain $is! Categories
Influence, Alignment, Information Sharing
Quality, Delivery, Capacity, Cost
Turnover, Union Issues
Market Power, Information Visibility Concentration,
Disruption Potential
Size, Asset Utilization, Capitalization, Profitability
Social Responsibility
Ionda of 5merica
Supplier Management 1%aluation
Source: Honda
Ionda of 5merica
Supplier Management Process
Source: Honda
Ionda of 5merica
Supplier Management Message
Source: Honda
#emand Forecast
0
?1 ?! ?$ ?4
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page 7:<
$is! Management 5pproach2
;ncertainty is measured using
forecast scenarios for demand, price, O a%aila+ility
vaila$ility Forecast
0%
!0%
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100%
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HPHorizon build demand
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data
Component "rice Forecast
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"
r
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c
e
;ig# Pri%e Base Pri%e 'o2 Pri%e
$esults of Supply Chain $is! Management implementation at IP
Direct materials quantity commitments
HP total materials
spend in PRM
contracts
Realized Savings
Program
life
>$1B+
>$75M
Indirect materials quantity commitments
Commodity
Cost
Savings
Commit-
ment
Custom ASIC 12% 12 mo
Scanner assy. % 12 mo
!las" memory #% $ mo
%arts for re&air '
refurbis"ment
(% ) mo
*ard dis+ dri,es 2.)% ) mo
-RAM . / 1.% )0$ mo
Average 6%
Commodity
Cost
Savings
Commit-
ment
1nergy 2#% 12 mo
$efining a Spend#>riented rame:or! to
Supply Chain $is! %s. Business Impact
'everage Strategi%
Ta%ti%al
Bottlene%<
Supply market complexity
S
p
e
n
d
Reduce structural
risk factors
I
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I
m
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a
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Extended supply chain complexity
(i.e., probability of adverse risk event)
From spend segmentation To understanding risk vs. reward
Source: 2008 The Hackett Group
129
• Discuss ho: your organi7ation is riding the glo+ali7ation :a%e2
– Ias changed it’s direction on glo+ali7ation
– Manage ris! %s. re:ard
– $e%ie: "otal Cost of >:nership
– Colla+orates across the organi7ation on sourcing decisions
– Ias managed the economic factors and :hich ones ha%e had the largest
impact to your organi7ation and ho: ha%e you mitigated the ris!

Discuss :hat you can ta!e +ac! to your organi7ation
– Institutionali7e a ris! management programGprocess
– $e#analy7e past sourcing decisions :ith ne: information
– $e%ie: cost dri%ers J ha%e they changed=
– >ther ideas=
?et:or!ing
• 5utomate Supply Chain
– Define the end#to#end transaction G process
– Consolidate, standardi7e and automate the defined transaction G process :hene%er possi+le
– Identify, optimi7e and Gor transform the transactions G processes that cannot +e automated
'e.g., mo%e processing off#shore(
• Centers of 1&cellence
– Create a :inning +est#shore location strategy
– Determine :hat strategies should +e glo+al %s. regional and :hich acti%ities need to +e
centrali7ed %s. decentrali7ed
• Spend 5nalytics
– Perform spend analytics on a glo+al +asis using tools that can pro%ide multiple dimensions to
support the identification of ne: sourcing and sa%ings opportunities
• "ransaction Management
– 5cti%ely manage compliance and demand management policies and procedures across the
end#to#end supply chain through SL5s and KPIs
1na+lers
1na+lers
• Supply Chain 5nalytics
– "otal Landed Costs# including all transportation costs, customs9
– Supply Chain ?et:or! Design and Modeling and >ptimi7ation "ools# 3hat#If
Modeling to loo! for the most efficient cost and ser%ice le%els
• Supply Chain 4isi+ility
– Loo! +oth upstream and do:nstream and gi%ing critical suppliers do:nstream %ie:
– 5utomated 5lerts and ?otifications to Supply Chain 1%ents# more efficient
BuyersGPlanners
• Cross unctional Supply Chain Dash+oard
– Minimi7e the effect of Silos
– Sales and >perations Planning Process# Metrics +ac! to e&ecuting the plan
Supply Chain 4isi+ility >perational
Impro%ements
7==
Aberdeen Group 2009
Benefits to SC 4isi+ility
• In%entory $eductions2
– Companies that are Best in Class in In%entory Management are 2.4 times
as li!ely to ha%e implemented SC 4isi+ility. Customer Ser%ice Le%els are at
M0B and In%entory Le%els ha%e +een reduce +y up to -<B since ,<<..
• Cycle "imes2
– Companies :ith SC 4isi+ility are 3 times as li!ely to ha%e a faster order to
fulfillment as companies :ith plans for an SC 4isi+ility implementation.
• >n#"ime Deli%eries2
– Companies that trac! more than A<B of domestic shipments are 2 times as
li!ely to ha%e an on#time deli%ery rate of M/B or higher.
7=>
Aberdeen Group 2006
"he Supply Chain Dash+oard#
"he !ey to an Integrated Supply Chain >rgani7ation
7=?
$e%enue 1BI"D5 In%entory "urns
#-<B
#,<B
#)<B
<B
)<B
,<B
-<B
.<B
Integrated Supply Chain
Structure and Metrics
unctional >rgani7ation
P
e
r
c
e
n
t

I
m
p
r
o
v
e
m
e
n
t
2
0
0
3
-
2
0
0
5
Having End-to-End Supply Chain Visibility and Span of
Control Enables the Business to Make Quick Resource Trade-
Offs to Respond to Changing Market Need
Supply Chain Executive Board 2006
3hat does tomorro: +ring=
uture "rends of >rgani7ations
– Soint %entures :ill increase
– 4ie: suppliers as e&ternal resources of inno%ation
– Lin!age of sales to purchasing
– Demand dri%en supply chains
– Integration across supply chain
– Impro%ement of supplier relationships
– $ethin!ing of out#source %s. in#source and near#shoring %s. off#shoring
– $is! management formal programs to secure continuity of supply
– Colla+oration :ith suppliers in the Product Lifecycle Management process
– Increased reliance on outsourced logistics
– 4isi+ility and tracea+ility of products has +ecome increasingly important
Conclusions
• 1conomic factors :ill dri%e many companies’ direction for
glo+ali7ation
• 5s companies KrestudyL total cost, there may +e opportunity to
source regionally and reduce cost
• 1nsure that one has a supply management ris! program that
proacti%ely alerts the organi7ation :hen ris! +ecomes too high and
ho: to act upon it
• ;nderstand the cost dri%ers in order to ma!e effecti%e and optimal
sourcing decisions
• "rends :ill continue that :ill encourage companies to continually
re%ie: Kre%erse glo+ali7ationL
Key Concepts

Hlo+al Management Perspecti%e

uture of Hlo+al Supply Management

Stages to Hlo+al Supply Management

$easons for Hlo+al Sourcing

Potential Pro+lems

@uestions Before Hoing Hlo+al

Supply Channels

Hlo+al "rade Intermediaries

International Procurement >ffices
Key Concepts

Direct Suppliers

1liminating Intermediaries

Identifying Direct Suppliers
– @ualifying Direct Suppliers

Preparing for Direct $elations

"he Initial Meeting

Currency 5nd Payment Issues

1&change $ates
– Payments

Letters of Credit
Key Concepts

Countertrade

Supply Management8s $ole

Creati%e Countertrade

Political 5nd 1conomic 5lliances

1uropean ;nion

?orth 5merican ree "rade 5greement

M1$C>S;$

5ssociation of Southeast 5sian ?ations

5sia Pacific 1conomic Cooperation
Hlo+al Management Perspecti%e

uture of Hlo+al Supply Management

Stages to Hlo+al Supply Management

$easons for Hlo+al Sourcing

Potential Pro+lems

@uestions Before Hoing Hlo+al
uture of Hlo+al Supply Management

3orld financial mar!ets are closely lin!ed through ,.#hour
trading

International +usiness is no longer limited to large
multinational corporations

e:er mar!etplace differences e&ist
– K3esterni7ationL of glo+al consumer mar!ets is occurring at a
rapid rate

Manufacturing firms in Kde%elopingL countries ha%e
impro%ed their capa+ilities

Producti%ity and *uality is dramatically impro%ing :orld:ide
C5PS Study

K9much has happened to change the :orld of +usiness and
supply management ### more to come.

9the main reason for glo+al sourcing is to reduce costs.
• 9glo+al sourcing resulting in cost reductions of )MB and a
total cost#of#o:nership reduction of ),B.

KChina, India, 1astern 1urope and Bra7il :ill continue to gain
importance as sources of supply o%er ne&t fi%e years9

9sourcing from ;.S., Canadian and 3estern 1uropean
mar!ets :ill decline.L
Industry "rends and Business 1n%ironment
 Iyper competiti%e +usiness
en%ironment :ith Cost G Core Competency
Pressure

Supply chain cost pressures 'sourcing,
manufacturing, transportation(,
Commoditi7ation of components,
1fficient management of :or!ing capital
 Com&le23 distributed multi0tiered su&&ly
c"ain networ+s3 dis&ersed across t"e
globe

Iuge amounts of disaggregated
demand and supply data, ina+ility to
monitor the e&tended supply chain
 !aster &ace of inno,ation3 and !aster
time0to0mar+et

Io: to impro%e the inno%ation cycle
and hit the narro: :indo: of
opportunity, through a more responsi%e
and timely decision ma!ing, across the
glo+al supply chain
 S"orter &roduct life0cycle and 4uic+
&roduct obsolescence

1%er decreasing product lifecycles can
result in rapid mar!et price erosion and
in%entory ris!s
 *ig"er e2&ectation of customer ser,ice
le,els

Io: to esta+lish deeper colla+oration
:ith suppliers, enhancing supplier
management, and achie%e >"I
targets consistently
Business Pain Points
I-C To& Ten Su&&ly C"ain %redictions
). Dri%e out unnecessary complication through segmentation, simplification, and the use of more practical
analytics.
,. BI and analytics tools that ena+le manufacturers to impro%e decision ma!ing at the strategic, tactical,
and operational le%els.
-. Impro%e supply side responsi%eness to demand side changes
.. Supply chain %isi+ility :ill clim+ on the I" application priority list to dri%e +oth cost sa%ings and impro%ed
ser%ice le%els.
/. "otal cost, supply chain organi7ations :ill gain a ne: appreciation for shortening lead times through
profita+le pro&imity sourcing strategies.
0. Continue to dri%e outsourcing of operations, +ut :ill also +ring a more enlightened perspecti%e to SaaS
and Qs!ills resourcing.K
F. Supply chain moderni7ation to dri%e fulfillment e&cellence through transportation, :arehouse, and la+or
management tools.
A. Impro%e information sharing and support more organic colla+orati%e processes across the e&tended
supply chain.
M. ;sing the cloud to le%el#set technology capa+ilities, :ith focus on aligning :ith the Qcloc! speedQ of the
supply chain.
)<. Incorporate mo+ility applications and smart de%ices into the supply chain :hile +alancing I"
management concerns :ith employee enthusiasm.
"he Issues
).0
6/27/14
Testerday "oday

I can loo! at 3IP +y :al!ing the plant floor
and $a: Materials In%entory :as in the
:arehouse.

Logistics Costs :as not a concern

I !ne: my production +ottlenec!s and could
schedule around the +ottlenec!

Planning :as monthly

le&i+ility :as Sust#In#Case In%entory

Le%eraging spend across the company :as
not an issue

1ngineering Change >rders :ere managed
in the plant# Mfg 1ngr, Production Control
and Purchasing

I ha%e $a: Materials, 3IP, and HI in multiple plants
and su+contractors and In#"ransit

I spend more on logistics than direct la+or in some
product lines

"he production +ottlenec! can +e at an outsourced
manufacturer

Planning Cycle is :ee!ly or is still monthly :ith daily
updates

1C>s must +e managed across the supply chain#
multi#tiers in the supply chain, outsourced assem+ly
and test and others.

Customers are re*uiring 4endor Managed In%entory

Information on parts, supply chain e%ents, supply
chain costs, customers and suppliers is critical to
+usiness performance
Stages to Hlo+al Supply Management

Stage >ne2 International Purchasing
# >rgani7ations focusing on le%eraging
%olumes.

Stage ":o2 Hlo+al Sourcing J >rgani7ations
focused on glo+al opportunities.

Stage "hree2 Hlo+al Supply Management#
>rgani7ations optimi7e supply net:or!s.
Implementing Strategic SCM
Strategic Supply Management Institute and The Warren Company
Copyright 2006
12
Pro-Active To Customer Responsive to Customer Reactive to Customer Isolated from Customer
Time Focus
Performance
Metrics
Speed & Integration,
Design Supply Base
Integrated Supply Strategy
Process Innovation,
Develop Reuirements,
!ear Defect "ree Supply
Suee#e t$e %endor
Internet Auctions !ot$ing
Basis of
Competitive
Advantage
Performance
Metrics
Timeliness & &fficiency
'o( Component)*nit Cost,
+n Time Delivery
Speed, &ffectiveness, ,onitor
Supply &nvironment
Coordination & Sync$ronicity
Interconnectedness
Relations$ips & Trust
Coordination & Cost, Develop
Suppliers
T$roug$-Put
-lo.al Impact
'everage Si#e of Buyer
Po(er Dynamics Bet(een Buyer
& Seller Do t$e /o.
,oderate Integration Internal &
&0ternal Integration1 Supply ,
R&D, 'ogistics, +perations,
&ngineering, ,ar2eting,
Customer Service
Partial Internal Integration
Procurement, 'ogistics,
+perations, &ngineering 'o( Internal Integration
Procurement & 'ogistics
!o Internal Integration
Purc$asing
Integration Level &
Functional Elements
Revenue & Bottom 'ine Impacts
Increase S$are 3older %alue
Transform Innovation into %alue Improve Bottom 'ine
Some Consideration of Revenue
Impacts
Improve Bottom 'ine
!o Consideration of Revenue
Impacts +ver$ead-Cost Center
Financial Impact
Innovation
Top & Bottom 'ine
Internal Integration
4uality,
/ust In Time
Total Cost of +(ners$ip
Purc$ase Price
Timely Availa.ility,
Convenience
Value Driver
! "trategic
"uppl# C$ain Mgmt
%! Proactive
"uppl# Management
&! Transactional
Mec$anical
'! (eactive
Clerical
Burt Burt- -Lynch Supply Chain Evolution Model Lynch Supply Chain Evolution Model
)!* +orld Class !* !) %!* %!) &!* &!) '!* '!) (ating
Transactional & Colla.orative Transactional, Colla.orative, &
Alliance
Adversarial & Transactional
Personal
"upplier
(elations$ips
e-Commerce
5S$ould Cost6 Analysis
T$omas Directory,
P$one Boo2
Rolode0
*nderstand Industries, Supply
Base
*nderstand Suppliers ,no-ledge
VA(IABLE
Building to +orld Class
Note: Some Elements of an Earlier Stage are Carried as a Foundation into the next stage, while other elements may be discarded
Copyright D.N.Burt & R.P.Lynch
Pro-Active as ,ar2et
Differentiator for Customer Considered As Part of TC+ Added Cost "actor !ot Considered
Environmental
igure ).0
[email protected]>A
$easons for Hlo+al Purchasing

Superior @uality

Better "imeliness

Lo:er "otal Costs

More 5d%anced "echnology

Broader Supply Base

1&panded Customer Base
Potential Pro+lems

Cultural Issues

Long lead times

5dditional In%entories

Lo:er @uality

Social and La+or Pro+lems

Iigher Costs of Doing Business

Iigh >pacity
@uestions Before Hoing Hlo+al

Does it *ualify as high#%olume in your industry=

Does it ha%e a long life 't:o to three years(=

Does it lend itself to repetiti%e manufacturing or
assem+ly=

Is demand for the product fairly sta+le=

5re specifications and dra:ings clear and :ell defined=

Is technology not a%aila+le domestically at a competiti%e
price and *uality=
Supply ?et:or! 1%aluation

Does sufficient engineering support e&ist to efficiently
facilitate 1C>s :hen they occur=

3ill the +uyer +e a+le to allo: sufficient time to phase out
e&isting Kin the pipelineQ in%entory=

3ill the supply manager’s firm ta!e the responsi+ility=

Is the firm prepared to ma!e a financial commitment for
e&pensi%e trips to the supplier=

Is management :illing to change the approach of ho:
+usiness and transactions are conducted=

Is the +uyer a:are of the en%ironment=
Supply Channels

5fter deciding to source glo+ally is to decide
:hat supply channels to use

"he lo:est price method for direct procurement

May +e infeasi+le due to total costs and limited
resources

Simplest :ay to source glo+ally is through the
use of an intermediary
Hlo+al "rade Intermediaries

Import merchants

1asiest method

Basically li!e +uying from a Kdomestic sourceL

Commission houses

5ct for e&porters a+road
– Paid +y the e&porter

"hey do selling, shipping and customs details

5gents or reps
– Same as Commission Iouse

1&cept, they :or! for the e&porter
Hlo+al "rade Intermediaries

Import +ro!ers

Commission paid +y sellers and +uyers

Charges fee for +ringing parties together

"rading companies

Perform all of the a+o%e
– May :or! for +oth or one party

Selling, shipping, customs details

Su+sidiaries
– acilitate international sales

1&ample2 Iitachi 5mericas
International Procurement >ffices

1&pands +uyer’s supplier +ase

5llo:s personal contact

Better understanding of local conditions

>n#site support

Staffed +y e&#patriates in the past, +ut not
necessarily true today
Direct Suppliers

1liminating Intermediaries

Identifying Direct Suppliers

@ualifying Direct Suppliers

Preparing for Direct $elations

"he Initial Meeting
1liminating Intermediaries

$esults in lo:est purchase price

But, direct procurement re*uires e&tra cost
+eyond price

$e*uires !no:ledge

$e*uires in%ol%ement of the company in all
aspects of the procurement
Identifying Direct Suppliers

Identify and contact !ey players at the supplier

4isit :ith the supplier8s !ey personnel

;se the meeting to pro%ide performance feed+ac!

1&plain your company8s goals and %alues

"a!e care not to appear to +e an unreasona+le

Consider the timing of your re*uest

If dealing :ith a ne: supplier, state your intention to deal
directly right from the start

Be prepared to gi%e reasons for direct +uying
@ualifying Direct Suppliers

Country and regional analysis

inancial condition
Preparing for Direct $elations
• Cultural preparation
• Interpreters
• "echnical and commercial analysis
– Prepare and re%ie: specifications and dra:ings
– Pac! samples or photos of re*uired materials if helpful
– Clearly prepare the *uality re*uirements
– Identify specific scheduling re*uirements
– Determine :hat B of production can +e placed offshore
– Determine re*uirements for special pac!aging
– Identify li!ely lead times
– De%elop a clear idea of the price o+Necti%e
Briefing on Tour irm for the Supplier

Information on the rele%ant product line and related
lines

5ctual and forecasted sales %olume

Customers

Mar!et share

;nclassified corporate strategy information

5nnual reports

5n indication of :hy the +uying firm is soliciting the
potential glo+al supplier8s interest '*uality= price=(
"he Initial Meeting

Pro%ide a +riefing on your firm

Pro%ide a tour of your facility

If the initial meeting is at the supplier’s facility, then tour
the supplier’s facilities

Meet :ith critical personnel

Descri+e ho: and :hen the supplier’s firm :ould
get paid

5l:ays remem+er that the potential supplier is
Nudging your firm at the same time
Currency and Payment Issues

Preferred method of payment is after receipt and
inspection of the goods

It may +e customary in many countries for ad%ance
payments to +e made prior to commencing :or!

Letters of credit are common in glo+al commerce

>f particular importance are2

1&change $ates
– Payments
Potential Situations in the 5+sence of i&ed 1&change $ates

5ssume the +uyer is a ;nited States
company9

Case )2 Contract is for payment in foreign
currency, e&change rate mo%es against
the dollar during performance of the
contract

Case ,2 Contract is for payment in foreign
currency
Case )

Contract :as a:arded for ) million euros

$ate of e&change :as E).<< C 1ur <.0AM
1ur l,<<<,<<<
1ur .0MGE C E),./),/M<


Io:e%er, dollar strengthens to E).<< C 1u )
1u l,<<<,<<<
1u ).<GE C E),<<<,<<<
Case ,

Contract is for payment in foreign currency and
the e&change rate impro%es so E) C 1ur )
1ur l,<<<,<<<
1ur )GE C E),<<<,<<<


"he +uyer has reduced its costs from the initial
li!ely amount of E),./),/M< to E),<<<,<<<.<<, a
-< percent sa%ing
Payments

Simplified :hen an intermediary or IP>
used

Direct payments are more difficult

Letters of credit are usually used
5 Hlo+al component
1uropean ;nion '1;(

Common foreign policy

Single currency

Central +an!

IS> M<<<2,<<<

$educed red tape
5d%antages of the 1uro

Hreatly $educed "ransaction Costs

Increased Competition

$educed 1&change $ate $is!

Increased "rade and Capital Mo%ement
?orth 5merican ree "rade 5greement

;.S., Canada, Me&ico

>riginal Hoals of ?5"5
– 1limination of tariffs

$emo%e agricultural +arriers

$emo%e manufacturing +arriers

$emo%e ser%ice trade +arriers
– $emo%e in%estment restrictions
– Protect intellectual property rights
– $esol%e en%ironmental concerns
Closing $emar!s

3ith respect to glo+al supply management,
supply professionals must learn to2

De%elop a glo+al supply management %ie:

Learn to deal :ith changing glo+al en%ironments

Deal :ith di%erse cultures effecti%ely

3or! :ithin distri+uted organi7ational structures

3or! :ith teams composed of glo+al mem+ers

Learn to communicate effecti%ely :ith cultural +eliefs
and %alues different than their o:n
5ppendi& 5
Currency $is!
Currency Issues
• loating currency2
– Currency not associated to the ;.S. dollar
– Sta+ility of the currency is more *uestiona+le
• Pegged currency2
– Currency associated to the ;.S. dollar
– More sta+le than floating or unpegged currency
• Cost dri%en product
– e: if any competitors
– Supplier can set price +ased on supplier costs
• Mar!et dri%en product
– Prices are set on the :orld mar!et
– Supplier can’t sell at a higher price
Iedging

;sed to minimi7e mar!et ris!

$e*uires organi7ed commodity e&change

Mar!etplace :here commodity is +ought and sold in large
*uantities

5ddresses ris! of +uying in dollars

Protects dollar %alue of future foreign currency cash flo:

International transactions in ;.S. dollars usually cost
more since ris! is lo:ered for +uyer
Iedging
• Common types of hedging

utures contracts
– Hi%e a fi&ed cost for foreign currency
– 1ffecti%ely free7es the e&change rate
– Currency options
– 5llo:s a +uyer to ta!e ad%antage of an increase in dollar %alue and protects
against decreases
• Length of hedging
• $is!s in hedging
• Choosing a strategy
– If dealing :ith a %olatile currency, then push for a price reduction
5dditional Slides
Common "erms in Hlo+al Supply
Management
Common "erms

Import duties 'or rates(

ad %alorem rate

Most common, a percentage of appraised %alue of the
merchandise 'such as /B(

specific rate

Specified amount per unit, such as E),<<< for a fur coat

compound rate

Com+ination of the ad %alorem and specific rates
Common "erms

Dutia+le or free of duty

HSP # Henerali7ed System of Preferences

Basically means KDuty reeL

M? # Most a%ored ?ation

Duty rates are lo:er than full rates 'statutory rates(.

Statutory $ates

ull rates for tariffs
Common "erms
• 5ssists
– ;sed in aiding the production outside of the +uying firm’s country and are
pro%ided +y the +uying firm
– Components
• Su+assem+lies or parts in imported goods
– Special tooling
• "ools, dies, molds, e*uipment
– Design Information

$ulings on imports
– 3ith respect to duties, these occur after entry documents ha%e +een filed
and the entry is li*uidated
– 5lso # there is no guarantee that su+se*uent shipments :ill recei%e the same tariff
Common "erms

Customs +ro!ers

Ser%e as the +uying firm’s agent

Iandle clearance of shipments through customs

Customs in%oice

;sed to clear merchandise through customs

?ot a commercial in%oice

Supplied +y ;.S. "reasury

illed out +y the supplier
Common "erms 'Continued(

Pro forma in%oice

Commercial in%oice estimate used mainly for
+an!ing O permit needs

1na+les the firm to o+tain an import or e&change
permit

Pac!ing list

More than one may +e needed

Mo%ement order, contents, descriptions ':eights,
mar!ings, measures(
Common "erms 'Continued(

Bill of lading

$eceipt issued +y the carrier for merchandise
– 5 contract for shipment of merchandise
– 5 receipt of merchandise
– Document of freight charges
– List of Iandling Instructions
– May contain a title

Bill of Lading "ypes
– >cean +ill of lading
– 5ir :ay +ills
Common "erms 'Continued(

Inspection certificate

Prepared +y entity independent of the e&porter

5ssures +uyer shipment is as ordered

Certificate of origin

May +e re*uired +y customs

5 product shipped from Iong Kong may not
actually ha%e +een made there, so this is an effort
to trace product origins
"otal Cost of >:nership

"otal cost of o:nership is a philosophy for
really understanding all supply chain
related costs of doing +usiness :ith a
particular supplier for a particular good or
ser%ice 'Lisa 1llam, May )MMM(
TCO
13-186
Key Concepts

"hree Components of "otal Cost

5c*uisition Costs

>:nerships Costs

Post#>:nership Costs

Purchase Price2 But >ne Component of Cost
13-187
Key Concepts

"C>, ?et Present 4alue 5nalysis '?P4(, and
1stimated Costs

"he Importance of "otal Cost of >:nership in Supply
Management

Ser%ice Pro%iders

$etail

Manufacturing
13-188
"hree Components of "otal Cost

5c*uisition Costs

>:nerships Costs

Post#>:nership Costs
13-189
"C> Components
• 5c*uisition costs
– Purchase price
– Planning costs
– @uality costs
– "a&es
– inancing costs
• >:nership costs
– Do:ntime costs
– $is! costs
– Cycle time costs
– Con%ersion costs
– ?on#%alue added costs
– Supply chain costs

Post#o:nership costs
– 1n%ironmental costs

3arranty costs

Product lia+ility costs
– Customer dissatisfaction
costs
TCO
13-190
5c*uisition Costs

Purchase Price

Planning Costs

@uality Costs

"a&es

Customs Duties and "ariffs

$egional "rade 5greements

Income#Base Shifting

inancing Costs
13-191
>:nership Costs

Do:ntime Costs

$is! Costs

Cycle "ime Costs

Con%ersion Costs

?on#4alue 5dded Costs

Supply Chain Costs
13-192
>:nership Costs

Supply Chain Costs
– orecasting
– 5dministration

"ransportation

In%entory

Manufacturing

Customer ser%ice

Supplier selectionGrelationships

Hlo+al sourcing
13-193
Post # >:nership Costs

1n%ironmental Costs

3arranty Costs

Product Lia+ility Costs

Customer Dissatisfaction Costs
13-194
"C>, ?et Present 4alue 5nalysis '?P4(, and 1stimated Costs

?P4 analysis is fre*uently incorporated into "C> analyses

?P4 analy7es present %alues of the initial e&penditure along
:ith the li!ely future re%enue and e&penditure streams

"he present %alue of a sum of future cash flo:s discounted
+y a re*uired rate of return
– ?P4 greater than 7ero suggests accepting the in%estment
– ?P4 less than < suggests reNecting the in%estment
– ?P4 C < is the point of indifference
13-195
Importance of "C> in Supply
Management

Ser%ice Pro%iders

$etail

Manufacturing

Supply ChainsGSupply ?et:or!s
13-196
Ser%ice and $etail Pro%iders

;nderstanding :hat dri%es the cost of o%erhead
e&penditures is crucial to any ser%ice +usiness

$e%enue must co%er the direct costs, material and la+or,
and o%erhead in order to generate a profit

"C> analysis of recurring material costs are often o%erloo!ed
and can yield great sa%ings

"C> analysis of the la+or +ase can reap lo:er per person costs,
greater +enefits, and impro%ed morale
– "C> analysis of e*uipment purchases may help reduce the
e&penditures for maintenance and parts o%er the li%es of the
in%estments
13-197
Manufacturing

Manufacturers are concerned :ith all of the same
"C> issues as ser%ice and retail firms, :ith some
added issues

Issues that are particularly important in cost
analysis for manufacturers are2

Direct materials

Manufacturing o%erhead

1mphasis should +e placed on the %ariance
+et:een Kshould costL and actual cost.

"his should not +e confused :ith price %ariance
13-198
5cti%ity Based Costing

5 maNor pro+lem in "C> analysis of manufacturers is
accurate allocation of manufacturing o%erhead

Many manufacturers ha%e used acti%ity#+ased costing
to help impro%e cost allocation

5cti%ity#+ased costing '5BC( is a techni*ue for
accumulating cost for a gi%en cost o+Nect that
represents the total and true economic resources
re*uired or consumed +y the o+Nect
13-199
Supply ChainGSupply ?et:or!s

"C> analysis may
include the study of2
– Manufactura+ility

Infrastructure

>utsource decision
– 5nalysis of suppliers
+eyond tier one
– Structure of foreign and
domestic
tariffsGdutiesGta&es
– Costs of deli%ery
– oreign regulations
– oreign
politicalGeconomic
sta+ility
– oreign e&change ris!
– LanguageGcommunicatio
n re*uirements
– 4olatility of end#customer
demand
– In%entory carrying costs

In%entory ris!

@uality costs
13-200
Concluding $emar!s

"C> is an analytical tool and a philosophy

5ccurate estimation of total costs re*uires
a cross#functional approach

Supply management is a critical mem+er
of such a cross#functional approach

"C> is also applica+le in one’s pri%ate life
ena+ling +etter decision#ma!ing
13-201

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