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

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Chapter 11

Sourcing

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Key Concepts• The Strategic Sourcing Plan

• Discovering Potential Suppliers

• Evaluating Potential Suppliers

• Selecting Suppliers» Bidding Versus Negotiation

» Reverse Auctions

» Two-Step Bidding/Negotiation

» The Solicitation

» Weighted-Factor Analysis

» Responsibility for Source Selection

• Developing Suppliers

• Managing Suppliers

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Key Concepts• Additional Strategic Issues

» Early Supplier Involvement

» Supply Base Reduction

» Single Versus Multiple Sourcing

» Share of Supplier’s Capacity

» Local, National and International Sourcing

» Manufacturer or Distributor

» “Green” Supply Management

» Minority- And Women-Owned Business Enterprises

» Ethical Considerations

» Reciprocity

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The Strategic Sourcing Plan

• World class Supply Management requires supply management to develop a strategic sourcing plan that details how supply management will discover, evaluate, select, develop and manage a viable supplier base

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Strategic Sourcing Plan StagesFigure 11-1Figure 11-1

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Discovery• Supplier Web Sites

• Supplier Information Files

• Supplier Catalogs

• Trade Registers & Directories

• Trade Journals

• Phone Directories

• Filing of Mailing Pieces

• Sales Personnel

• Trade Shows

• Company Personnel

• Other Supply Management Departments

• Professional Organizations

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Evaluating Potential Suppliers• Supplier Surveys

• Financial Condition Analysis

• Third Party Evaluators

• Evaluation Conference

• Facility Visits

• Quality Capability Analysis

• Capacity Capability Analysis

• Management Capability Analysis

• Service Capability Analysis

• Flexibility Capability Analysis

• Information Technology Capability Analysis

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Selecting Suppliers

• Bidding Versus Negotiation

• Reverse Auctions

• Two-Step Bidding/Negotiation

• The Solicitation

• Weighted-Factor Analysis

• Responsibility for Source Selection

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Bidding versus Negotiation

• Few topics generate more passionate discussions than bidding versus negotiation

• The selection of bidding or negotiation should be decided by using objective criteria, a total cost perspective and sound supply management logic

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Prerequisites to Bidding

• Dollar value must be large

• Specifications must be clear

• Market must consist of an adequate number of sellers

• Sellers must be qualified and want the contract

• Time available must be sufficient

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Conditions Demanding Negotiation

• Impossible to estimate costs with a high degree of certainty

• Price is not the only important variable

• Purchasing firm anticipates a need to make changes in the specification

• Special tooling of setup costs are major factors

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Even if the previous list is met…here are two arguments for Negotiation

• The negotiation process is far more likely to lead to a complete understanding of all issues of the procurement

• Competitive bidding tends to result in sacrifices in product quality, development efforts, and other vital services

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Reverse Auctions

In contrast to competitive bidding, reverse auctions produce “real-time” interaction.

Though effective for achieving cost savings, reverse auctions are not appropriate for all situations.

Reverse bid process can have an adverse affect on long-term relationships.

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Two-Step Bidding/Negotiation

• Used in situations where inadequate specifications preclude the initial use of traditional competitive bidding

• The two steps are:

» Step 1: Technical Proposals

– IFBs for Step 2 are sent only to those sellers who submitted acceptable technical proposals

» Step 2: Price Bidding

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The Solicitation

• IFB

• RFP

• Item description

• Info on quantities

• Delivery schedules

• Special terms and conditions

• Standard terms and conditions

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Weighted Factor Analysis

• Steps to developing

» Develop factors to serve as criteria

» Develop sub-factors or performance factors

» Develop a scoring factor

» Score or evaluate the supplier

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Developing Suppliers

• Development of suppliers is one of the greatest untapped frontiers in supply chain management

• Even suppliers recognized as the “best of the best” require investment on the part of the buying firm to realize the full benefit of the collaborative relationship

• This important topic is addressed in detail in the chapter on Supplier Development

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Managing Suppliers

• Managers must ensure the suppliers perform as required.

• Suppliers must meet the firm’s long-term needs.

• If suppliers are unlikely to meet future requirements the firm may:

» Assist with financing / technological assistance.

» Develop new sources.

» Be required to develop the capability internally.

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Additional Strategic Issues• Early Supplier Involvement

• Supply Base Reduction

• Single Versus Multiple Sourcing

• Share of Supplier’s Capacity

• Local, National and International Sourcing

• Manufacturer or Distributor

• “Green” Supply Management

• Minority- And Women-Owned Business Enterprises

• Ethical Considerations

• Reciprocity

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Early Supplier Involvement

• Early supplier involvement (ESI) is an approach in supply management to bring the expertise and collaborative synergy of suppliers into the design process

• ESI seeks to find “win-win” opportunities

• Today, early supplier involvement (ESI) is an accepted way of life at many proactive firms and a requirement for WCSM

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ESI Opportunities• Materials

• Services

• Technology

• Specifications and Tolerances

• Standards

• Order Quantities

• Lead Time

• Processes

• Packaging

• Transportation

• Redesigns

• Assembly Changes

• Design Cycle Time

• Inventory Reductions

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Reasons for Utilizing ESI

• Get supplier inputs before the design is frozen

• Capitalize on the latest technology

• Save time since design cycles are getting shorter

• Let the supplier know that it is part of the team

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Supply Base Reduction

• Supply base reduction is achieved through both reducing variety and increasing consolidation

• Two benefits of supply base reduction cited by John Deere are:

» increased leverage with suppliers

» better focus and supplier integration in product development

• Increased leverage is also due to the increased involvement with the suppliers which builds goodwill and trust

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Considerations for Single Sourcing• Lower total cost results from higher volume

• Quality considerations dictate

• Buyer obtains more influence with the supplier

• Lower costs to source, process, expedite, inspect

• Just-in-time requirements

• Significantly lower freight costs may result

• Special tooling is required

• Total system inventory will be reduced

• Supplier will have an improved commitment

• Improved interdependency and risk sharing result

• Time to market is critical

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Dual Sourcing Using the “70-30” Approach

• 70 percent of the volume is awarded to one supplier

• 30 percent to a second supplier

• Economies of scale are obtained from the “big supplier”

• The “little supplier” provides competition

• When the “big supplier” fails to perform the percentages may be reversed by the buyer

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Considerations for Multiple Sourcing• Protect the buyer during bad times

• Maintain competition

• Provide a back-up source

• Meet local content requirements

• Meet customer’s volume requirements

• When the customer is a small player in the market for a specific item

• Avoid complacency on the part of a supplier

• When the technology path is uncertain

• Suppliers tend to “leapfrog” in technology

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Share of Supplier’s Capacity

• Many firms try to not exceed more than 15 to 25 percent of any one supplier’s capacity

• This issue became all too real in the early 2000s

» Many companies cancelled orders that had long supplier lead times, which resulted in suppliers being caught with, in some cases, hundreds of millions of dollars of work-in-process

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Local, National and International Sourcing• The lines between local, national, and international

sourcing have become blurred in the last 30 years

• Local source

» Firm’s headquarters and all facilities are located in the city or region where the materials or services will be used

• National source

» The source is headquartered within the country and has facilities in multiple regions throughout the country

• International source

» Firm is headquartered outside of the buying firm’s country, but this does not define the location of operations

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Local Buying Advantages

• Closer cooperation between buyer and seller is possible

• Delivery dates are more certain

• Lower prices can result from consolidated transportation and insurance

• Shorter lead times reduce inventory

• Rush orders are filled faster

• Disputes are usually more easily resolved

• Implied social responsibilities to the community are fulfilled

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National Buying Advantages

• Economies of scale

• Superior technical assistance

• Better handling of fluctuating demand

• Shortages are less likely

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Manufacturer or Distributor

• Potential Benefits of a Distributor over Buying Direct from the Manufacturer

» Economy of scale

» Reduction of orders

» Reduction of paperwork

» Special services

» Technical advice

» Credit

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“Green” Supply Management

• Recycled materials

• Environmental issues

• Liability issues

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Minority- And Women-Owned Business Enterprises

• Many forces motivate a buying firm to ensure that MWBE businesses receive a share of the firm’s business, such as:

» Federal and state legislation

» Set-aside quotas in government appropriations

» Actions of regulatory bodies

» Firm’s “corporate social consciousness”

» Customer base includes MWBE businesses and their employees

» Bottom-line profitability

» Good business sense

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Ethical Considerations

• Conflicts of interest

» Exists when supply managers must divide their loyalty between the firm which employs them and another firm

» Such conflicts always should be avoided in all source selection decisions

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Reciprocity

• Reciprocity exists when supply managers give preference to suppliers that are also customers

• It is entirely legal to buy from one’s customers at fair market prices, without economic threat, and without the intent of restricting competition

• Reciprocity can become illegal when the activity restricts competition and trade

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Reasons to Not Engage in Reciprocity• Reciprocity doesn't follow sound principles of

buying and selling

• Companies may relax their competitive efforts as a result of reduced competition

• Sales departments may develop a false sense of security

• New customers may be hard to find because of pre-established relationships with competitors

• Company reputations may be impaired because of bad publicity

• Conspiracy and restraint-of-trade situations can develop, with their attendant legal dangers

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Concluding Remarks

• The increase in long-term collaborative relationships is highlighting the need to develop strategic sourcing plans

• The plan aids in source selection by detailing how suppliers will be discovered, evaluated, selected, developed and managed

• The plan should be developed in a collaborative environment that includes all relevant functional area representatives and supply chain members