Sourcing and Supply Management

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Copyright © 2017 McGraw-Hill Education. All Rights Reserved.

Learning Objectives

LO10-1 Define supply management and understand its impact on a firm’s performance.

LO10-2 Define and describe each of the six supply management goals.

LO10-3 Analyze costs and make insourcing/outsourcing decisions.

LO10-4 Explain the steps in a strategic sourcing process.

LO10-5 Describe the components in a sourcing strategy.

LO10-6 Assess and select suppliers. 

LO10-7 Understand ways to manage ongoing supplier relationships.

10–2

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2

Chipotle®: Sourcing and Supply Management

10–3

LO10-1

© Stephen Brashear/AP Images

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3

Supply Management

Supply Management: identification, acquisition, positioning, and management of inputs and supplier relationships

Also called purchasing or procurement

10–4

LO10-1

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4

Effective Supply Management

10–5

A firm’s strategic objectives are better met when effective supply management:

Ensures timely availability of resources

Identifies, assess, and mitigate supply chain risk

Reduces total cost (not just purchase price)

Enhances quality

Enables access to technology and innovations

Fosters social responsibility

LO10-2

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5

Effective Supply Management

10–6

Supply Risk: probability of an unplanned event that negatively affects a firm

Delays and disruptions

Thefts of intellectual property

Price increases

Product safety problems

LO10-2

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6

Total Cost of Ownership

10-7

LO10-2

When the Cost Occur

Type of Costs

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7

Before the transaction

Time spent and costs of searching for, visiting, evaluating, and certifying suppliers.

Purchase price and costs of ordering, transporting, expediting, receiving, inspecting, and following up.

After the transaction

During the transaction

Costs of inventory, supply risk, production downtime, defects in finished goods, warranties, safety recalls, replacements, repairs, lost sales, liability, and damaged reputation.

Activity

Think of some of the total costs of ownership for the following items:

Car or bicycle

iPod or other music device

Textbook

10–8

LO10-2

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8

Goals Addressed by Sustainability

LO10-2

10–9

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9

Results from Sustainability

LO10-2

10–10

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Effects of

Sustainability

Improves financial performance

Increases quality

Instills customer loyalty

Enhances a firm’s reputation

Lower total costs

Effective Supply Management

Quality: A product’s quality is tied to the quality of its inputs.

Technology and Innovation: Suppliers are potential sources of innovation and new technology.

10–11

LO10-2

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11

Effective Supply Management

10–12

Social Responsibility: behaviors that benefit related communities

Add value to communities

Increase social diversity

Environmental responsibility

Ethical behavior

Financial responsibility

Respect human rights

Safe working environment

Others?

LO10-2

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12

Insourcing/Outsourcing

10–13

Insourcing: inputs from within the firm

Outsourcing: inputs from outside the firm

Make or Buy Decision: choosing between insourcing or outsourcing

LO10-3

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13

Outsourcing Advantages and Disadvantages

10–14

LO10-3

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14

Insourcing/Outsourcing

10–15

LO10-3

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15

Insource or Outsource? Steps 1-4 in Decision

10–16

LO10-4

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1. Assess Fit with Firm’s Competencies

What is the product’s or process’s relationship to the firm’s current or future core competencies?

What are savings from outsourcing compared to losing core competencies or intellectual property?

2. Evaluate the Suitability for Outsourcing

Characteristics that favor outsourcing: (1) Mature products with standard processes, (2) known technology where many capable suppliers and intellectual property risk is low.

3. Evaluate the Reasons for Outsourcing

When product or process seems appropriate for outsourcing, compare the benefits of outsourcing versus insourcing.

4. Assess All Relevant Quantitative Costs.

If previous steps indicate that outsourcing makes sense, compare the cost of making the product internally versus the cost of purchasing it.

Insource or Outsource? Steps 5-8 in Decision

10–17

LO10-4

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5. Assess All Qualitative Factors

Important qualitative factors may include: loss of control; risk of dealing with a supplier; location, quality of supplier’s management team, compatibility of organizational cultures and values; supplier’s flexibility, labor-management climate, warranty and support systems; and proprietary information and degree of secrecy required.

6. Review the Capability of Suppliers

This includes a review of the technical, financial, manufacturing, and quality-related capabilities of suppliers.

7. Make and Implement a Decision

If you decide to outsource, select a supplier and document the anticipated benefits of outsourcing. If you decide to insource, document the reasons for this decision.

8. Monitor the Decision and Revise It as Necessary.

Compare the actual results of the decision against estimates and identify potential problems.

Student Activity

10–18

LO10-4

Many universities are outsoucing services that were traditionally insourced.  Make a list of the major services that your university offers.  Which are opportunities for outsourcing and which should be insourced? Why?

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18

Strategic Sourcing Process

10–19

LO10-4

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19

Sourcing Strategies

10–20

Leverage

Consolidate

purchases

Strategic

Build

Relationships

Bottleneck

Use

Multiple

sources

Noncritical

Increase

efficiencies

Low High

Level of Supply Risk

High

Value

of

Spend

to Firm

Low

LO10-5

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20

Sourcing Strategies

10–21

Supply Base Optimization: number of suppliers to use

Too few increases shortage and price risks, innovation may be limited

Too many increases complexity and makes supply management difficult

LO10-5

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21

Sourcing Strategies

10–22

Capabilities and location are important:

Proximity impacts ease of communication, transportation costs and community perceptions

Consideration of trade barriers and incentives

Global presence may impact access to markets

LO10-5

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22

Supplier Relationships

10–23

LO10-6

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23

Assess and Select Suppliers

10–24

Competitive bidding: price is most important factor, specifications are clear, high value, several equally qualified sources

Request for Proposal (RFP) or Quote (RFQ): describes what customer wants; supplier responds with cost and other data for consideration

LO10-6

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24

Assess and Select Suppliers

10–25

Weighted Point Model: establishes performance categories that are weighted by importance

Table 10-2

LO10-6

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25

Activity

Assume you need a new place to live or are considering several job offers. Use a weighted point model to assist in the decision making process.

What criteria are important to you?

How important is each criteria?

How will you break a tie score?

10–26

LO10-6

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26

Assess and Select Suppliers

10–27

Online Reverse Auctions: suppliers bid in real time for buyer’s business

Supplier can make multiple bids

Usually price focused

Negotiation: bargaining process of planning, reviewing, analyzing, compromising to reach agreement

LO10-6

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27

Managing Supplier Relationships

10–28

Information sharing: buyers and suppliers need to share timely data about demand, supply and delivery

Electronic Data Interchange (EDI): structured, secure mode of transmitting data

LO10-7

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28

Managing Supplier Relationships

10–29

Supplier Scorecard: track and report supplier performance in key areas

Supplier Certification: assessment of supplier’s ability to meet buyer’s needs

Supplier Relationship Management (SRM): technology enabled data gathering about suppliers to manage strategic relationships

LO10-7

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29

Supplier Management Summary

Effective supply management improves performance

In/Outsourcing requires both quantitative and qualitative analysis

Strategic sourcing finds and manages suppliers that meet the firm’s strategic objectives

Relationships with suppliers vary based on cost and risk

Suppliers are selected using online auctions, competitive bidding, or negotiation

Supplier relationship management involves communication and coordination

10–30

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Category WeightRatingScoreRatingScoreRatingScore

Quality 40%31.252.031.2

Delivery 40%20.831.241.6

Price 20%51.030.620.4

Weighted Score 100% 3.0

3.8

3.2

Supplier A Supplier B Supplier C