SIMCHI CHAPTER 9-1

PROCUREMENT AND OUTSOUPROCUREMENT AND OUTSOURCINGRCING STRATEGIESSTRATEGIES

Presented by:Presented by: 　　　　 Jearnmaneengam Amornsak Jearnmaneengam Amornsak Kuhirunyarat Wongwanida Kuhirunyarat Wongwanida

JullasingJullasing Phanu Phanu

Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-biProcurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-biPage 2

ObjectiveObjective

• To understand the important roles and key To understand the important roles and key issues involved in outsourcing and issues involved in outsourcing and procurement processesprocurement processes

• To be able to apply outsourcing and To be able to apply outsourcing and procurement strategiesprocurement strategies

• To realize the impact of E-Markets in E-To realize the impact of E-Markets in E-ProcurementProcurement

Presented by Jearnmaneengam AmornsakPresented by Jearnmaneengam Amornsak


OutlineOutline• OutsourcingOutsourcing

– Outsourcing Benefits and RisksOutsourcing Benefits and Risks– Framework for Buy/ Make DecisionsFramework for Buy/ Make Decisions

Case StudyCase Study ：： FreeMarkets OnLine, Inc.FreeMarkets OnLine, Inc.• E-Procurement and E-MarketE-Procurement and E-Market

– Framework for E-ProcurementFramework for E-Procurement• ConclusionConclusion



OutsourcingOutsourcing

IntroductionIntroduction• Outsourcing components have increased Outsourcing components have increased

progressively over the yearsprogressively over the years• Increasing the profit by reducing the costIncreasing the profit by reducing the cost



Outsourcing - Outsourcing - Benefits and RisksBenefits and Risks

The benefits of using outsourceThe benefits of using outsource• Economies of scaleEconomies of scale

– Aggregation of many orders reduces costs, both in Aggregation of many orders reduces costs, both in purchasing and in manufacturingpurchasing and in manufacturing

• Risk pooling Risk pooling – Demand uncertainty transferred to the suppliers Demand uncertainty transferred to the suppliers (CEM)(CEM)

– Suppliers reduce uncertainty through this effectSuppliers reduce uncertainty through this effect• Reduce capital investmentReduce capital investment

– Capital investment transferred to suppliers. Capital investment transferred to suppliers.


Aggregation of the demandAggregation of the demand across locations likes the across locations likes the

higher demand is higher demand is compensated compensated

with the lower to reduce with the lower to reduce the variable of demandthe variable of demand



The benefits of using outsource (Continued)The benefits of using outsource (Continued)• Focus on core competencyFocus on core competency

– Buyer can focus on its core strengthBuyer can focus on its core strength– Allows buyer to differentiate from its competitors Allows buyer to differentiate from its competitors

• Increased flexibilityIncreased flexibility– The ability to better react to changes in customer demandThe ability to better react to changes in customer demand– The ability to use the supplier’s technical knowledge The ability to use the supplier’s technical knowledge – Critical in the industries: Critical in the industries:

• HHigh-tech products igh-tech products where technologies change very where technologies change very frequentlyfrequently

• FFashion productsashion products which have a short life cycle which have a short life cycle




Outsourcing risksOutsourcing risks• LossLoss of competitive knowledgeof competitive knowledge

– Critical components to suppliers may open up Critical components to suppliers may open up opportunities for competitors opportunities for competitors

– Implies that companies lose their ability to Implies that companies lose their ability to introduce new designs introduce new designs

– Using many outsourcing suppliers may Using many outsourcing suppliers may obstructive the development innovations of obstructive the development innovations of the organization the organization




Outsourcing risks (Continued)Outsourcing risks (Continued)• Conflicting objectivesConflicting objectives

– Demand IssuesDemand Issues• In a good economyIn a good economy

– Demand is highDemand is high– buyers require to make long-term commitments about orderingbuyers require to make long-term commitments about ordering

• In a slow economyIn a slow economy– Long-term commitments entail huge financial risks for the Long-term commitments entail huge financial risks for the

buyersbuyers

– Product design issues Product design issues • Buyers would like to solve design problems as fast as possibleBuyers would like to solve design problems as fast as possible• Suppliers focus on cost reduction Suppliers focus on cost reduction







Presented by Kuhirunyarat Wongwanida Presented by Kuhirunyarat Wongwanida


Outsourcing - Outsourcing - FrameworkFramework

• Manufacture or outsource ?Manufacture or outsource ?Analyzing the core of the business is needed Analyzing the core of the business is needed – Dependency on capacityDependency on capacity

• The firm has the knowledge and the skillThe firm has the knowledge and the skill– Dependency on knowledgeDependency on knowledge

• The firm has the knowledge and the skill, but can The firm has the knowledge and the skill, but can not effort to manufacturingnot effort to manufacturing



Product ArchitecturesProduct Architectures• Modular product Modular product

– Made by combining different componentsMade by combining different components• Components are independent of each otherComponents are independent of each other• Standard interfaces are used ( i.e. PC )Standard interfaces are used ( i.e. PC )

• Integral productIntegral product– Made up from components whose Made up from components whose

functionalities are tightly relatedfunctionalities are tightly related• Not made from off-the-shelf componentsNot made from off-the-shelf components• Evaluated on system performance, not on Evaluated on system performance, not on

component performance ( i.e. car engines )component performance ( i.e. car engines )



Product ArchitecturesProduct Architectures

A Framework for Make/Buy DecisionsA Framework for Make/Buy Decisions

Keep production internal

Outsourcing is an option

Outsourcing is very risky

Integral

Opportunity to reduce cost through outsourcing

Outsourcing is an opportunity

Outsourcing is riskyModular

Independent for knowledge and capacity

Independent for knowledge, dependent for capacity

Dependency on knowledge and capacity

Product





Integral







Product




Integral







Product


Changeover of outsourcing in Changeover of outsourcing in 1990s1990s

Industrial Buyer

Manufacturing Representative

Manfac. Rep.

Manfac. Rep.

Suppliers

FreeMarkets

Online


Buyers lack of expertiseFragmented supply marketVariation among suppliers

Information problem for buyers to make decisions


FreeMarkets OnLine, Inc.FreeMarkets OnLine, Inc.

• Founded in 1995 and was on the verge of Founded in 1995 and was on the verge of breaking even in 1998.breaking even in 1998.

• From From $$75,000 investment, company achieved 75,000 investment, company achieved $$6.0 millions revenue in 1998.6.0 millions revenue in 1998.

• An online market making firm that enabled An online market making firm that enabled industrial buyers to link up with their potential industrial buyers to link up with their potential suppliers in a live electronic bidding.suppliers in a live electronic bidding.

• The result: The result: Generated over 15% in Generated over 15% in procurement procurement costs saving costs saving for buyersfor buyers. .



The Market-Making ProcessThe Market-Making Process

• Core Service:Core Service: – To provide on-line industrial market-making services To provide on-line industrial market-making services

that culminated in real-timethat culminated in real-time Competitive Bidding Events (CBEs); 90-mins to 2-hrs. 90-mins to 2-hrs.

FreeMarkets Suppliers Buyers

BidWareBidWare BidServer

Internet

Internet

Functions to monitor market price, submit bids, and print report.

Functions to monitor bidding, and print result report.



Framework in Market-Making Framework in Market-Making ProcessProcess

IdentifySavings

Opportunity

PrepareTotal-cost

RFQ*

Identify Screen, Support

Suppliers

ConductOnLineCBEs

ProvidePost-BidSupport

• 5 Steps in FreeMarket Online 5 Steps in FreeMarket Online

Analysis expenditure and savings for buyers

Defining all elements of Request for Quotations,requirements of drawings, volume

forecast, cost.Screening the potential suppliers with buyers and supporting RFQ to suppliers

Training sessions to suppliers, submitting real-time bidsCollecting cost breakdown,

final supplier analysis.



What is the value to the What is the value to the Customers?Customers?• BuyersBuyers

– Do not have to deal with manufacturers’ representativesDo not have to deal with manufacturers’ representatives– Access to sourcing information that is otherwise Access to sourcing information that is otherwise

difficult/expensive to assembledifficult/expensive to assemble– Cost Savings (up to 43%, average 15%)Cost Savings (up to 43%, average 15%)

• SuppliersSuppliers– More opportunities to access the large industrial buyers More opportunities to access the large industrial buyers

• Especially for small or overseas suppliersEspecially for small or overseas suppliers– Lower sales and marketing costs Lower sales and marketing costs – Helps supplier benchmark other competitorsHelps supplier benchmark other competitors– Get the good perspective of marketplaceGet the good perspective of marketplace



Revenue ModelRevenue Model• A hybrid of service fees + sales commissionsA hybrid of service fees + sales commissions

– Charged buyers a monthly service fee based on Charged buyers a monthly service fee based on the size of the market making team. the size of the market making team. • Ex. Typical project with engineering work costs Ex. Typical project with engineering work costs $75,000/month x 2.

– Charged winning suppliers a commission fee varied by supply industry.

• Ex. General case is 2.5% of purchase price.Ex. General case is 2.5% of purchase price.

• The business reached breakeven point within The business reached breakeven point within 3 years.3 years.



The Value PropositionThe Value Proposition

• Serving as a intermediary between buyers Serving as a intermediary between buyers and suppliersand suppliers

• Increasing the number of suppliers Increasing the number of suppliers involved in the bidding eventinvolved in the bidding event

• Identifying, qualifying, and supporting Identifying, qualifying, and supporting supplierssuppliers

• Conduction the bidding eventConduction the bidding event• Improve supply chain efficiencyImprove supply chain efficiency

Presented by Jullasing PhanuPresented by Jullasing Phanu


E-Market’s DrawbacksE-Market’s Drawbacks

• Improper to establish long-term Improper to establish long-term relationshipsrelationships

• Problems in transaction fee paidProblems in transaction fee paid– Both sellers and buyers resist payingBoth sellers and buyers resist paying– Inflexible transaction fees systemInflexible transaction fees system



Change in E-Market LandscapeChange in E-Market Landscape

• Value-added public e-marketsValue-added public e-markets• Private e-marketsPrivate e-markets• Consortia-based e-marketsConsortia-based e-markets• Content-based e-marketsContent-based e-markets






E-market offers additional value-added services such as E-market offers additional value-added services such as inventory management, distribution planning, demand inventory management, distribution planning, demand forecasting etc.forecasting etc.





A private e-market belong to big manufacturers which A private e-market belong to big manufacturers which increases the manufacturers total supply chain performances. increases the manufacturers total supply chain performances.

Wal-MartWal-Mart

IBM IBM Dell Computers Dell Computers

Sun Microsystems Sun Microsystems




Suppliers Manufacturers


E-Market in a specific industry, providing standard E-Market in a specific industry, providing standard system necessary for the specific industrysystem necessary for the specific industry





E-Market expertise in miscellaneous services E-Market expertise in miscellaneous services such as maintenance and repairing.such as maintenance and repairing.


A Framework for E-ProcurementA Framework for E-Procurement

• Types of productTypes of product– Indirect materialsIndirect materials– Strategic componentsStrategic components– Commodity productsCommodity products




• Indirect materialIndirect material– Low riskLow risk– Content-based e-marketsContent-based e-markets

• Strategic componentsStrategic components– High riskHigh risk– Private e-market or consortia-based e-marketPrivate e-market or consortia-based e-market




• Commodity productsCommodity products– High riskHigh risk– Public e-market, private e-market, or Public e-market, private e-market, or

consortia-based e-marketconsortia-based e-market– Strategy based on inventory and priceStrategy based on inventory and price


InventoryInventoryLevelLevel

ManufacturersManufacturers SuppliersSuppliers

HoldingHoldingCostCost










Thank YouThank YouFor Your AttentionFor Your Attention

SIMCHI CHAPTER 9-1

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