Strategic Sourcing

Dr. Ron Tibben-Lembke

Old View of the World

One company does all processing, from raw material through delivery

Vertical Integration

Henry Ford’s River Rouge PlantOwned forests, iron mines, rubber plantation, coal minesShips, railroad linesDock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track

1927 Model A Production begins15,000,000 cars in 15 years120,000 employees in WWII

Supply Network View of the World

• Integrated international networks of companies process, produce and distribute products.

Spring Hill, Tennessee

Saturn Layout

Computer Example

Wacker Siltronic makes silicon wafers: buy sand

grow into long crystals

slice into thin wafers

Chip ProductionChip burned in a $2b “wafer fab”

Wafer cut into chips and “packaged”

CD DriveChip stuffed onto board by Flextronics, Celestica, etc.

CD drive assembled by separate contract manufacturer

Green Printed Circuit Board from different supplier

CD drive, with a brand name on it, sold to Gateway

Strategic Sourcing

Figure out what to buy from whom

What do we want to accomplish?More effective!

More efficient!

Outsourcing - What is it?

Transfer activities to outside providersOutside providers do activities

Resources: people, facilities, equipment

Decision-making responsibility

OEM = Original Equipment Manufacturername on the product, does not produce

Flextronics or Solectron makes it for you

Outsourcing – Why do it?

Organizationally-driven reasonsFocus on what you do bestMore flexible capacity Employees: career paths

Improvement-driven reasonsBetter quality & productivity, cycle time

Gain skills not otherwise available

Associate with superior providers

Financially-driven reasonsReduce assets, improve ROALower fixed costsCash from selling capital equip.

Make or Buy Decision

DIY: Lower cost

No capable suppliers

Inadequate supply

Competitive Issues

Core competencies

Specialization

Low purchase cost

Lack of capacity

Want to gain skill

Reduce inv. costs

Management focus

Patent issues

Reasons to Make Reasons to Buy

Other Factors

Degree of coordination with other activitiesRelationship-specific investmentsEasy to copy technologies, or low IP (intellectual properties) protection

What to not Outsource

Core activities

Key to the business

Do not confer competitive advantage

Strategic activities

Key source of competitive advantageX-box – Microsoft never considered making

Flextronics in Guadalajara$5 / hr vs. $1 in Doumen, China

Outsourcing Example

In 1981, IBM ‘PC’.

Consumers care about hardware

No one cares about the software that lets them talk to the processor.

Outsourced the OS to whom?

Anybody heard of “Microsoft?”

UCSD Pascal $450

CP/M $175

MS-DOS $60

IBM: ‘05 Lenovo $1.75bMS: 2007 EBITDA $25b

Outsourcing in the News

IT & telecommunications changesNobody can tell you’re calling India

White collar jobs – now it’s seriousEducated workforces

Call centers, programmers

Privacy / security concerns

Supply Chain Performance

Inventory Turnover (turns) =Cost of goods sold / Average inv. Value

Weeks of supply =( Avg. Inv Value / CoGS ) * 52 Weeks

Fill Rate =Percentage of orders shipped on time

Supply Chain Designs

Efficient – economies of scaleRisk-Hedging – pooled resources, multiple sources of supply, share inv., need good ITResponsive – Changing consumer needs, mass customization, build-to-orderAgile – responsive to changing needs, pooled resources

Efficient

Risk-Hedging

Responsive

Agile

Low High

Low

High

SupplyUncertainty

Demand Uncertainty

Modular Components Take advantage of modules: parts or products previously prepared

Restaurants: prepared ingredients, assembled to order

Suppliers can develop new, interesting products to use more quickly, cheaply

Variety is gained by different combinations of same components

Mass Customization

Highly customizedIntegrate design, processes, supply network

Supply components cheaply to production pointsFast, responsive production, quick deliveryHigher weight, lower value

Managing the Supply ChainPostponement -- withhold any modification until as long as possible. Keep product generic “vanilla”

HP BenettonHome Depot paint department

Channel Assembly -- have distributor assemble products from components

HP Inkjet Printers

Printers made in Vancouver, sent via ship through Panama Canal to EuropeEurope warehouse stocks inventory by country

physically different-- power supplymanuals different languagesSubstitution not allowed

Re-supply time very long

Euro Plugs

No standardized power supplies for Europe

Different power supply for every country.

HP Inkjet Printers

Redesigned printers so that power supply added in Europe

Re-engineer product, power supplyAssembly done in a warehouse (Quality?)Manuals added in EuropeMany expensive changes

Store ‘vanilla’ boxesPostpone point of differentiation25% cost reduction

Delayed Customization

Production Storage Shipping Storage

Before

After

Benetton

• Sweaters of undyed wool, dyed once demand is known

• Dyeing LT much faster than production• How many undyed sweaters to make?• How many Red, Green, Blue, also, if this production

process is cheaper, and you know you’ll sell some minimum amount?

Behr Paints

• Small # of bases• Small # tints• Unlimited # combinations• Keep stock colors on hand?

– How many gallons?– Which ones?– Lower labor costs– Higher inventory costs

Bullwhip Effect

• Lack of information sharing can cascade through the supply chain.

• Small changes at retail level lead to huge swings at manufacturing, like a bullwhip

• Several retailers order all at once, distributor thinks sales have jumped, orders a much bigger order, etc.

• Better: sales information shared across the “Value Chain.”

Electronic Data Interchange

• My computer talks to yours, tells you exactly what I want to order, when

• You fill out a form, very compressed message sent, viewed as form

• Software, hardware expensive to implement

Sample Purchase TransactionST88850*1 Transaction Set identifierBEG*00*NE*00498765**010698 Beginning of SegmentPID*X*08*MC**Large Widget Description of ProductP01**5*DZ*4.55*TD Baseline Item DataCTT*1 Transaction TotalsSE*1*1 End of Segment

Supply Chain Technologies• ASN -- lets customer know exactly what

has been sent

• Standardization -- reduce number of variations of a part in use

• Drop Shipping -- Supplier sends directly to the store, not to store’s warehouse

XML

• eXtensible Markup Language

• Standard for E-Business• XML provides self-describing information.• Much easier, faster to implement or modify

than EDI.• Expected to eventually, replace EDI, but not

nearly as fast as was expected.• Standardization through RosettaNet efforts