1. CHAPTER 4- STRATEGIC SOURCINGFOR SUCCESFUL SUPPLY CHAIN MANAGEMENT Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

2. Learning ObjectivesYou should be able to: Describe how strategic sourcing plans are developed &implemented. Describe the various strategic sourcing activities. Describe purchasings role in managing key supplier relationships. Describe performance criteria used to assess suppliers. Describe how strategic supplier relationships impact the firm. Describe how a reverse auction works. Understand the importance of sharing benefits of strategicpartnerships. Understand the strategic role played by the purchasing function indeveloping and improving the supply chain. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing2 3. Chapter Four Outline Developing Successful Sourcing Managing & Developing 2nd- StrategiesTier Supplier Relationships Supply Base Reduction Use of e-Procurement Systems Programs Rewarding Supplier Evaluating & Selecting Key Suppliers Performance Strategic Alliance & Supplier Benchmarking Successful Certification Programssourcing Practices Outsourcing Programs Using Third-Party Supply Chain Early Supplier InvolvementManagement Services Supplier Management & Assessing & Improving Firms AlliancePurchasing Function Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing3 4. Introduction Drivers of Strategic Sourcing Reduce costs and delivery cycle times Improve quality and long-term financial performance Increase number of global competitors Increase customer focus Reduce high costs of globalization and materials, Deliver more innovative products more frequently & cheaply than competitors Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 4 5. Developing Successful SourcingStrategies Successful Sourcing Strategies are different for functional products and for innovative products. Functional Products are MRO items and other commonly low profit margins with relatively stable demands and high levels of competition. Innovative Products are characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition.Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing5 6. Developing Successful Sourcing Strategies- Cont. The following is a framework for supply chain strategy development: Step 1 The firms suppliers are classified as belonging either to the innovative or functional category.Step 2 The goals and strategies of the inbound portion of the supply chain are developed.Step 3 Supply chain capabilities are evaluated & compared to required performance.Step 4 Set goals for improving capabilities.Step 5 Implement work plan.Step 6 Monitor progress & adjust the work plans. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 6 7. Developing Successful Sourcing Strategies- Cont. Supply Chain Sourcing Strategy Framework Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 7 8. Supply Base Reduction Programs Supply base reduction is most often the initial supply chain management effort.Buyer-supplier partnerships are easier with a reduced supply base.Supply base reduction results in: Reduced purchase prices Fewer supplier management problems Closer and more frequent interaction between buyer and supplier Greater levels of quality and delivery reliability. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing8 9. Evaluating & Selecting Key Suppliers When evaluating suppliers to be used in a strategic partnering, purchase cost becomes relatively less important.Key Supplier Selection is conducted by a cross functional team selection approach wherein purchasing staff, primary users, product designers, and manufacturing personnel participate. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 9 10. Strategic Alliance and Supplier Certification Programs Supplier certification programs are one way to identify strategic alliance candidates. Firms often develop their own formal certification programs, & most require ISO 9000 or similar certifications as one part of the certification process.A site audit using a cross-functional team to identify a suppliers process capabilities, materials and methods monitors base-line management practices. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 10 11. Outsourcing Programs Outsourcing allows a firm to: Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce management problems Improve manufacturing flexibility. Risks associated with outsourcing, include Loss of control Increased need for supplier management Increased reliance on the supplier. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 11 12. Early Supplier Involvement Early supplier involvement (ESI) is perhaps one of the most effective supply chain integrative techniques.Under ESI, key suppliers become more involved in the internal operations of the firm, particularly with respect to new product and process design concurrent engineering and design for manufacturability techniques.Value engineering activities help the firm to reduce cost, improve quality, and reduce new product development time. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 12 13. Supplier Management and Alliance Development Alliance development, an extension of supplier development refers to increasing a key or strategic suppliers capabilities.Supplier alliances result in better market penetration access to new technologies and knowledge, and higher return on investment than competitors with no such strategic alliances.Alliance development will eventually even extend to a firms second-tier suppliers, as the firms key suppliers begin to form their own alliances. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 13 14. Managing & Developing Second-TierSupplier Relationships Successful alliance development can indirectly create successful, high-performing second-tier & third-tier relationships.Organizations may require direct suppliers to acquire goods and services from specific suppliers and under specific conditions. They can also work directly with supplier alliance partners in solving second-tier supplier problems, designing supplier selection and certification programs. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 14 15. Managing & Developing Second-Tier Supplier Relationships- Cont.Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing15 16. Use of e-Procurement Systems Primary benefits of e-procurement include: Cost savings Free-up time to concentrate on core business E-procurement systems enable the concentration of a large volume of small purchases with a few suppliers in electronic catalogues, which are made available to the organizations users. Reverse auctions- suppliers enter Web site. At a pre-designated time and date, qualified suppliers try to underbid their competitors and can monitor the bid prices until the session is over. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 16 17. Rewarding Supplier PerformanceRewarding suppliers provides an incentive to surpass performance goals.Punishment, a negative reward, may reduce future business; or a bill- back amount equal to the incremental costs resulting from a late delivery or poor quality.Strategic supplier agreements allow suppliers to A share of the cost reductions More business and/or longer contracts Access to in-house training seminars and other resources Company and public recognitionPrinciples of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 17 18. Benchmarking Successful SourcingPractices BenchmarkingAn effective way to improve supply chainperformance. Benchmarking data regarding sourcingpractices can be obtained in any number ofways, both formal and informal. Resources are available to learn about and implement sourcing practices:The Center for Advanced Purchasing Studies.Supply-Chain Council.Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing18 19. Using Third-Party Supply Chain Management Services Third-party logistics (3PL) & other supply chain service providers are growing and may involve a firms sourcing, materials management, and product distribution responsibilities.These 3PL charge a fee for services while saving costs (estimated at 10 to 20% of total logistics costs); and improving service, quality, and profits for their clients.Vendor-managed inventory (VMI) services is one of the more popular roles of 3PL. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 19 20. Assessing and Improving the FirmsPurchasing Function The purchasing function is one of the most value-enhancing functions in any organization, preferable to periodically monitor the purchasing functions performance against set standards, goals, and/or industry benchmarks.Surveys or audits can be administered as self-assessments among purchasing staff as part of the annual evaluation process. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 20 21. Supplier Relationship Management Software Skill set requirements of purchasing professionals have been changing. Purchasing personnel must today exhibit world-class skills such as: 1. Interpersonal communication 6. Customer focus 2. Ability to make decisions 7. Ability to manage change 3. Ability to work in teams8. Influencing & persuasion 4. Analytical skills skills 5. Negotiation skills9. Strategic skills10. Understanding businessconditions Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. 2005 Thomson Business and Professional Publishing 21