By K. Sashi Rao Management Teacher and Trainer K.Sashi Rao/May 2013.

K.Sashi Rao/May 2013

Supply Chain Sourcing Strategies By

K. Sashi RaoManagement Teacher and Trainer


Stages of Strategy Evolution

IV- Fully Integrated

Supply Chains

II - Moderate Development

I - Basic Beginnings

III - Limited Integration

Quality/cost teams

Longer -term contracts

Volume leveraging

Supply base

consolidation

Supplier quality focus

Ad hoc supplier alliances

Cross-functional sourcing teams

Supply base optimization

International sourcing

Cross-location sourcing teams

Global sourcing Strategic

supplier alliances

Supplier TQM development

Total cost of ownership

Non-traditional purchase focus

Parts/service standardization

Early supplier involvement

Dock to stock pull systems

Global supply chains with external customer focus

Cross-enterprise decision making

Full service suppliers

Early sourcing Insourcing/

outsourcing to maximize core competencies of firms throughout the supply chain


Sourcing Strategies Basis All ‘strategic sourcing ’ initiatives can be

looked at from three broad angles: Volume concentration Vendor- related methods and

partnerships Process improvements and innovations Rest of this presentation goes into individual

details of these above recurrent themes Ultimately, all these are aimed to meet the

set objectives and goals of strategic sourcing- with the maximum bottom line impact

The benefits of strategic sourcing and drivers of TCO are numerous and go far beyond simple reductions in unit costs

Primary Benefits of Strategic Sourcing

Primary Benefits of Strategic Sourcing

Reduction in Cost Per Unit

Reduction in Cost Per Unit

Change in Consumption/

Volume

Improved Operating Efficiency

Improved Operating Efficiency

Improved Focus on Socio-

economic Goals

Improved Focus on Socio-

economic Goals

Pricing Improvements• Lower unit price• Volume rebates• Payment term

discounts

Supply Chain Savings• Cost of capital• Warehousing costs• Shipping costs

Reduced Lifecycle Costs• Maintenance costs• Operating costs• Disposition costs

Reduced Procurement-Related Operating Expense

Reduced Non-Procurement Related Operating Expense


Volume


Volume

Socio-economic Goals • Structured analysis of

small/disadvantaged business opportunities

• PO Processing• Accounts Payable• Receipt/Warehousing• Standardized

procurement process

• Other operating efficiencies

Performance Monitoring• Structured metrics and

periodic review of contractor performance

Demand Management• Eliminate demand• Reduce consumption• Encourage substitution• Change product mix

Specification Review• Eliminate “gold-plating”• Simplify specifications• Alternative products

DRIVERS OF TCO


Volume Concentration Methods Combining commodity items for various plants

and worldwide locations(to seek bulk quantity price discounts)

Rationalization of item specifications to promote standardization and variety reduction

Reduced procurement costs thro larger order sizes and thro ‘group buying’ or ‘centralized buying’ especially for commodity items

Transportation in full truck/full container loads to reduce logistics costs

Consolidation of supply base to enable larger individual order sizes


Vendor Related Strategy Basics(1)

Fundamental realization that 70% or more of a product’s value could come from its raw materials and input suppliers

Development of high quality and reliable suppliers

Reduction of supplier base Proximate location of suppliers( auto

industry best example)


Vendor Related Strategy Basics(2)

Treating suppliers as partners Early involvement in new

products/projects Building trust and long term relationships Collaborative relationship called for either

thro long term contracts, supplier agreements, partnership deals, strategic alliances, and even joint ventures


Supplier Relationship Management (SRM)

SRM is a comprehensive approach to strategically manage an enterprise’s interactions with others who supply its goods and services

Its goal is to streamline the business processes between the firm and its suppliers

It is aimed to operate in a real-time on-line environment

It incorporates business practices and software that together form a part of the ‘information flow’ of their supply chain linkages


SRM Features

Idea sourcing and value creation- using suppliers as idea sources for improvements duly rewarding them

Supplier development- wherein suppliers are helped to improve their technical-commercial resources and capabilities thro training, investments and any other help

Joint review of costs- to do value chain analysis and see how costs can be eliminated/reduced

Supplier performance valuation- by agreeing on standards to be met, their measures and specific goals

Information sharing- that is accurate, timely, relevant and meaningful in a transparent manner

Relationship nurturing- building trustful, respectful relationships and following ethical behavior and practices


Multiple Sourcing

Multiple Sourcing (traditional approach) Have many suppliers for each item to avoid risks

of non-supply or short -supplies Set up competitive situations amongst suppliers Engage in pre negotiations every time Withhold information to get better prices Suppliers face uncertainty about future business

weakening them Buyer try to benefit from seller’s weaknesses,

confusion and fear Still useful where technology is evolving and can

derive upgraded benefits


Single Sourcing

Single sourcing (Modern/Japanese approach) Deal with only one or two suppliers at most Avoid engaging in conflict with suppliers Engage in joint cost reduction to obtain lower costs Lower total costs due to economies of scale buying

and process, expedite, follow-up and certify Exchange relevant business information; obtain

better business gains Suppliers informed of future business prospects,

capacity and technology constraints Benefits from cooperation, mutual trust and

dependability Trust (contractual, competence and goodwill) is

the key to such relationships

Purchasing Cost Reduction

Thro’ superior negotiation skills to get lowest possible “total ownership cost” from suppliers

Adopting ‘strategic positioning’ models as covered in portfolio analysis

Supplier tie-ups to reduce inventory assets thro’ JIT supplies, vendor managed inventory, pooled/consolidated buying

Reduce all cycle times- in order processing, supplier lead times( using intermediaries, guaranteeing volume commitments and challenging supplier lead times); order to delivery times- all of which carefully measured and tracked for benchmarking


Vendor Performance

Fundamentally: Performance = Capability x

Motivation

Capability = Vendor’s ability to meet your needs

Motivation= Vendor’s interest and potential commitment


Vendor Capability

This is based on detailed assessment of his capability to meet procurement needs in terms of :

Product/item technical specifications Product/item quality parameters Capacity to meet quantity needs and over

foreseeable future Acceptable cost and price structure Delivery and schedule requirements Service and responsiveness expectations

criteria


Vendor Motivation

Based on value of your business to the vendor (%of his turnover) CURRENTLY

Value of your expected business to the vendor (% of his turnover) in FUTURE ( next year, 3->5->10 years)

Overall attractiveness of your business to vendor- both as financial and non-financial benefits


Vendor Capability and Motivation

100%

50%

Low Medium High

Motivation

Cap

abil

ity

N

B

L

A

M

H

H=High; M=Moderately high; L= Low; N= Negligible

C


Vendor Commitment

High

Low

Capable but uncommitted

Ideal

To be avoided

Willing but incapable

Middle of The road

Motivation

Cap

abil

ity

High


Vendor Evaluation

Vendor evaluation is an essential part of sourcing to select the best amongst many suppliers

Its basis is to first establish evaluation criteria, their importance and weightage in the overall supplier evaluation process

These criteria will have to be item-specific, be as objective/tangible as possible ; and also add subjective/intangible elements of customer service, communication effectiveness, flexibility etc

Vendor ratings is the outcome of such evaluations to make supplier comparisons absolutely objective


Vendor Evaluation Criteria Set criteria should first clearly define the product

scope and technical specifications Evaluation criteria should cover technical,

commercial, logistical, financial and other organizational aspects

Rigor of such criteria can be decided based on ABC analysis and previous portfolio analysis

Building such an evaluation matrix of criteria is the fundamental basis of sound evaluation

These could be split into 4 broad categories under Quality, Price, Availability and Service Responsiveness

Such a matrix should serve purpose not only of vendor selection but also ongoing vendor performance linked to ‘promised/offered’ standards and actual ‘delivered’ performance


Developing Evaluation Criteria Technical - product specifications/range, technology

used/development, product development/R&D Quality - product specifications range/tolerance, supply

variability , consistency; supply rejections rate Price - price basis, cost-price relationship, cost/price

history and development Commercial - credit terms/facilities, supply/delivery basis,

discount/rebates, excise/sales tax/octroi /other Financial - firm ownership/equity status, financial/working

capital/inventory performance Sales and customer service – sales history/performance,

growth plans/targets, capacity buildup/planning, customer responsiveness, complaint handling

Availability/delivery- lead times, speed of delivery, meeting schedules, global supply/logistics

Systems- information systems, transfer and dissemination, ERP/IT packages used, EDI etc


Overall Performance Criteria

Competency- all round professional capability and performance, integrated SCM systems, ERP etc

Capacity- ability to meet quantitative and qualitative needs on sustaining basis

Control-effective management information and control systems

Commitment- suppliers willingness to invest in physical, intellectual and financial resources

Cash resources- financial resources , stability, profit generation, ROI, asset-turnover ratio

Cost- cost structure, cost management and cost reduction and control

Consistency- ability to show quality and reliability over time


Vendor Ratings -example

FACTORS

Supply

Target

Weight

Supplie

r

Rating

Supp

lier Ranking

SUPPLIER

A B C A B C

Function Q 3 8 6 10 24 18 30

Cost C 3 3 5 9 9 15 27

Delivery A 2 7 9 4 14 18 8

Service support

R 2 5 3 8 10 6 16

TOTAL 10 67 57 81

Rank 2 3 1


Vendor Development

Vendor Development is one of the important aspects of strategic sourcing

It is meant to continuously improve the value that is received by a firm from its suppliers

It is any activity that a firm undertakes to improve the supplier’s performance and capabilities to fully meet and satisfy its needs now and in the future

It takes a long term view of a key supplier’s capabilities and capacity as an ongoing and dynamic process


Vendor Development Tools(1) Sharing common goals and building trust Periodic liaison with key suppliers Setting performance standards and metrics Offering long term purchasing contracts Joint problem-solving activities Aiming for supplier quality self certification Making them JIT ready thro tight inventory

controls


Vendor Development Tools(2)

Creating dedicated supply development teams Helping them source their raw materials

competitively and be fully involved(especially for small scale vendors)

Teaching suppliers tactics of self-development Involving suppliers in new product and process

development Conducting frequent improvement-focused

seminars for suppliers Sharing the cost savings from supplier

development activities Overall, to help build and improve the supplier’s

supply management system


Outsourcing and Sub-Contracting

Outsourcing is a key sourcing strategy to reduce overall costs( also refer to Make- versus Buy discussion in an earlier presentation)

In outsourcing , the vendor takes full responsibility for item/component manufacture and delivery to set quality standards in time

Outsourcing usually done for non-core functions like transportation, warehousing and logistics

Sub-contracting, a form of outsourcing, involves the same processes throughout, but for the fact that the required raw material inputs are supplied by the customer. This applies to big organizations getting small and standard type of components made by those in the medium to small sector

Sub-contracting work is also known as ‘jobbing’ or ‘pure conversion work’

In both cases, buying organizations derive organizational and cost benefits


Outsourcing Programs

Outsourcing benefits: Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce operational problems once system in place Improve manufacturing flexibility and capacity

management .

Outsourcing Risks: Possible loss of control Suppliers becoming potential competitors( Atul-Ciba case) Increased need for supplier and quality management Increased reliance on the outsourcing supplier


Process Related Methods Procurement process improvements-

standardization, simplification and new methods like reverse auctions

Inventory planning and control(including EOQ, inventory modeling and vendor –managed inventory(VMI)

Technological innovations like GPS/GIS/Bar coding/RFI usage

Use of IT methods and broader approaches like ERP and CPFR


E-Business Revolution

Supply chains and SCM now need to have enhanced cost control and provide improved customer value for gaining competitive advantage

E-supply chains have emerged as a powerful strategy to achieve these goals

Faster and accurate SCM information flows is its foundation

Finally, they result in lower transaction costs, speedier transactions , greater transparency in business transactions- all adding to organizational efficiency and effectiveness


B2B Modes

FORWARDAUCTION

-Supplier cartels

EXCHANGES-on-line markets

-auctions-catalogues

BARGAIN/NEGOTIATE

-supplier side EDI-supplier centric

REVERSEAUCTION

-Buyer cartels

SELLERS

One/Few Many

One/Few

Many

BUYERS


E-Procurement Functionalities E-sourcing- to find potential suppliers thro’ internet,

online trading B2B market places E-information- to obtain supplier/product information,

specs, quality, capacity/capability, supplier portals et al E-tendering- to send RFI/RFP/RFQ and enable vendor

short listing E-reverse auctions- to enable buying at lowest prices in

real-time with cut off times E-ordering- to integrate use of web tools for ordering

direct and indirect purchase items and receiving such goods including QA parameters

E-collaboration- to exchange latest/updated product data/specs, joint forecasting (CPFR) and use of latest tools like virtual meetings, bulletin boards and shared knowledge management systems


E-CommerceLogistics Operations

Order processing- all web-based, real time, online transactions

Inventory management- order placement linked to stocks, delivery options/schedules and triggered stock replenishments

Order execution -order filling, packing, readiness for dispatch

Shipping-physical transportation links to service providers and dispatch details

Tracking and tracing- in-transit phase Payment cycle- by credit/debit card/cheque/e-transfer,

credit terms, payables management Transaction security -fraud checking/authentication

systems, confidentiality requirements Order changes/cancellations etc- systems flexibility to be

provided Reverse materials flows-physical returns and payment

reversal mechanisms


Inventory and Inventory System

Inventory- Any physical resource (RM,WIP, FG, Spares) that a firm holds in stock with intent to transform and/use to make value-added form and sell

Inventory system- It is a set of policies and controls that monitors inventory levels, determines what levels to maintain, triggers when stocks should be replenished and helps set ordering size/volumes


Why Inventory?

Inventory plays an important role in the operation/working capital/order to cash cycle

Cash Received Purchase Order

Raw Materialinventory

Other ProductionResources

Work-in-progressInventories

Other FactoryResources

FinishedGoods Inventories

DistributionAnd Retail

Debtors orReceivables

Operating Cycle


Inventory Fundamentals— aggregate inventory

This deals with managing inventories according to classification( raw materials, work-in progress, consumables and spares and finished goods) based on their performed functions

It is financially oriented and concerned with the costs and benefits of holding different types of inventories and their flows

It takes into account the uncertain demand, production and supply patterns and conditions and the need to strike a balance

It has to be aligned with the organization’s business objectives and targets


Inventory Fundamentals-item-wise inventory

This deals with managing inventories at individual item level

This calls for establishing decision rules about each and every item

Involves answers to following questions:

What individual items are most important? How individual item inventory is to be managed? How much to order at one time ? When to place an order?


Inventory Fundamentals-ABC Analysis

As applied to inventories, it means that usually about 20% of items make up of 80% of the total inventory value, 30% of items for 15% value and 50% of items balance 5% value

This ABC classification of individual items helps to identify the inventory importance of each item

It also provides guidance as to setting item-wise ordering and inventory control policies and principles


CPFR– a definition

CPFR is a set of business processes that helps to automate and improve sales forecasting and stock replenishment between two trading partners

Under CPFR, trading partners do the following:- agree on mutual business objectives and measures- develop joint sales and operational plans- electronically collaborate to generate and update sales forecasts and replenishment plans


CPFR-origins

Original Wal-Mart (retailer) - Warner Lambert (manufacturer) project (1995) collaborating on joint demand forecasting and developing production schedules thro internet and EDI networks

Grew out of retail consumer goods industry Voluntary Inter-Industry Commerce Standards

(VICS) Group; first published guidelines in 1998 More than 100 Fortune 500 companies are now

participating in and refining CPFR; P&G and Wal-Mart world leaders in its use

CPFR software tools are available for this purpose


Sourcing Strategy-a consolidated framework

Conduct product value analysis and engineering

Substitute materials Pursue system buying alternatives Optimize life cycle costs

• Reengineer joint processes• Share productivity gains• Integrate logistics• Support supplier operations improvement

Establish/develop key suppliers Employ strategic alliances/partnering Examine strategic make versus buy Develop integrated supply chain

Expand geographic supply base Develop new suppliers Profit from global supply/demand imbalances

Compare “total” costs Model “should-costs” Renegotiate prices Unbundle pricing

Consolidate number of suppliers Pool volume across units Redistribute volume among suppliers Combine volume from different

commodity categories

Exploit Buying Power Create an Advantage

ConsoldateSupplyBase

Best PriceEvaluation

VolumeConcentration

ProductSpecificationImprovement

JointProcess

Improvement

RelationshipRestructuring

StrategicSourcing

Profile OfSourcing Group

Sourcing Strategy ForSourcing Category

Supplier Portfolio Generation

Competitive Supplier Selection

Operational IntegrationWith Suppliers

Continuous Benchmarking OfSupply Market

Selection Of Implementation

Path

4

1

2

3

5

6

7

Online (“e”) RFPsInternet Negotiations (Reverse Actions)

New Tools

By K. Sashi Rao Management Teacher and Trainer K.Sashi Rao/May 2013.

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Transcript of By K. Sashi Rao Management Teacher and Trainer K.Sashi Rao/May 2013.