6 IntroductionSourcing - all of firm’s activities used to manage external resources.Strategic sourcing - managing the firm’s external resources to support firm’s long term goals.Drivers of Strategic SourcingReduce costs & delivery cycle timesImprove quality & long-term financial performanceIncrease number of global competitorsIncrease customer focusReduce high costs of globalization & materials,Deliver more innovative products more frequently & cheaply than competitors
7 Ethical and Sustainable Sourcing Strategies Business Ethics is the application of ethical principles to businessCorporate Social Responsibility is the practice of business ethicsEthical Sourcing is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior
8 Ethical and Sustainable Sourcing Strategies (Continued) Ethical Policies should include –Determining where all purchased goods originated and the manner in which they were madeKnowledge of the suppliers’ workplace principlesInclusion of ethics as a performance ratingIndependent verification of vendor complianceReport of supplier compliance to stakeholdersProvision of detailed ethical sourcing expectations to suppliers
9 Ethical and Sustainable Sourcing Strategies (Continued) Green purchasing is aimed at ensuring products or materials meet environmental objectives e.g. waste reduction, reuse and recyclingSustainability is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challengesConsiders worker safety, wages, working conditions, human rights
10 Ethical and Sustainable Sourcing Strategies (Continued) Sustainable Sourcing should seek to –Grow revenuesNew sustainable product introductionReduce costsIncrease resource efficienciesManage riskLink brand to social consciousness of consumerBuild intangible assetsBuild social and environmental responsibility
11 Ethical and Sustainable Sourcing Strategies (Continued) Functional Products - MRO items & other commonly low profit margins with relatively stable demands & high levels of competitionInnovative Products - characterized by short product life cycles, volatile demand, high profit margins, & relatively less competition
12 Ethical and Sustainable Sourcing Strategies (Continued) Framework for ethical and sustainable sourcing strategy development –Step 1 – Establish corporate ethical and sustainable sourcing strategiesStep 2 – Train purchasing staff and implement policiesStep 3 – Prioritize items based upon ethical and sustainability opportunities and ease of implementationStep 4 – Develop performance measurement systemStep 5 – Monitor progress and make improvements. Increase use of green and fair trade productsStep 6 – Expand focus to include other departments
13 Ethical and Sustainable Sourcing Strategies (Continued) Ethical and Sustainable FrameworkStep 1: Establish policiesStep 2: Train and implementStep 3: Prioritize opportunitiesStep 4: Develop performance measurement systemsStep 5: Monitor progress and make improvementsStep 6: Expand focus to other departments
14 Supply Base Rationalization Programs Supply base rationalization (AKA supply base reduction or supply base optimization) is often the initial supply chain management effortBuyer-supplier partnerships are easier with a rationalized supply base & result in –Reduced purchase pricesFewer supplier management problemsCloser & more frequent interaction between buyer & supplierGreater levels of quality & delivery reliability
15 Ethical and Sustainable Supplier Certification Programs Supplier certification programs are used to identify strategic supplier alliance candidatesFirms use in-house formal certification programs, & most require ISO 9000 / or similar certifications as part of the certification processBuyers can monitor quality assurance methods & specify the type of acceptance sampling & statistical process control methods used
16 Outsourcing Products and Services Outsourcing allows a firm to –Concentrate on core capabilitiesReduce staffing levelsAccelerate reengineering effortsReduce management problemsImprove manufacturing flexibility.Risks associated with outsourcing, include –Loss of controlProduction decisions & intellectual propertyIncreased reliance on suppliersIncreased need for supplier management
17 Outsourcing Products and Services (Continued) In-sourcing (backsourcing) –Reverting to in-house production when quality, delivery, and services do not meet expectationsCo-sourcing (selective sourcing) –The sharing of a process or function between internal staff and an external provider & provides flexibility to decide what areas to outsource, when, and for how long.
18 Early Supplier Involvement Early supplier involvement (ESI) highly effective supply chain integrative techniquesKey suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniquesValue engineering activities help the firm to reduce cost, improve quality & reduce new product development time
19 Early Supplier Involvement (Continued) Vendor managed inventory (VMI) –Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyerFrom the buyer-firm’s perspective –Supplier tracks inventoriesDetermines delivery schedules and order quantitiesBuyer can take ownership at stocking locationFrom the supplier’s perspective –Avoids ill-advised customer ordersSupplier decides inventory set up & shipmentsOpportunity for supplier to educate customers about other products
20 Early Supplier Involvement (Continued) Electronic data interchange (EDI)Allows a supplier to profile demand & determine accurate forecastsEDI also provides reorder point data to permit timely deliveriesSupplier co-location or JIT IISupplier’s employee is embedded in buyer’s purchasing department to forecast demand, monitor inventory & place orders with access to sensitive files & records
21 Strategic Alliance Development Alliance development, an extension of supplier development refers to increasing a key or strategic supplier’s capabilities.Supplier alliances result in better market penetration access to new technologies & knowledge, & higher return on investmentAlliance development eventually extends to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances.
22 Negotiating Win-Win Strategic Alliance Agreements Collaborative negotiations (aka integrative negotiations) –Both sides work together to maximize the outcome or create a win-win resultRequires open discussions and a free-flow of information between partiesDistributive negotiations –Refers to a process that leads to self-interested, one-sided outcome
23 Negotiating Win-Win Strategic Alliance Agreements (Continued) StepsDescription1. Build preparation processGain an understanding of both parties’ interests; brainstorm value-maximizing solutions; identify objective criteria to evaluate fairness of agreement.2. Develop negotiation databaseReview previous negotiations to catalogue standards, practices, precedents, metrics, creative solutions used, and lessons learned.3. Design negotiation launch processCreate an environment to work together to create a shared vocabulary, build working relationships, and map out a shared decision-making process.4. Institute feedback mechanismCreate process to provide feedback to negotiating teams and capture lessons learned.(Table 4.4)
24 Use of e-Procurement Systems Primary benefits of e-procurement include –Cost savingsFrees-up time to concentrate on core businesse-procurement systems –Concentrate large volumes of small purchases with a few suppliers, using e- catalogues, available to the organization’s users.Reverse auctions –Pre-qualified suppliers enter Web site & at pre- designated time & date, try to underbid competitors, monitoring bid prices until the session is over.
25 Rewarding Supplier Performance Rewarding suppliers provides an incentive to surpass performance goalsPunishment is a negative reward, may be to reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor qualityStrategic supplier agreements can reward suppliers by allowing –A share of the cost reductionsMore business and/or longer contractsAccess to in-house training seminars & other resourcesCompany & public recognition
26 Benchmarking Successful Sourcing Practices Measuring what other businesses do best and matching their performance is an effective approach to improving supply chain performance. Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal & informal.Resources for learning about & implementing sourcing practices –The Center for Advanced Purchasing Studies.Supply-Chain Council.
27 Using Third-Party Supply Chain Management Services Third-party logistics (3PL)A growing industry that involves managing a firm’s sourcing or materials &/or product distribution responsibilities3PL providers charge a fee for services for an estimated savings of 10 to 20% of total logistics costs; benefits include improved service, quality, & profits for their clients.Vendor-managed inventory (VMI) services – One of the more popular roles of 3PL.Lead logistics provider (LLP), aka 4PL –A primary 3PL provider; one that oversees other 3PL’s
28 Assessing & Improving the Firm’s Purchasing Function The purchasing function is one of the most value-enhancing functions in any organizationIt is preferable to periodically monitor the purchasing function’s 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.
29 Assessing & Improving Firm’s Purchasing Function (Continued) Skill set requirements of purchasing professionals have been changing. Purchasing personnel must today exhibit world-class skills such as –Interpersonal communicationAbility to make decisionsAbility to work in teamsAnalytical skillsNegotiation skillsCustomer focusAbility to manage changeInfluencing & persuasion skillsStrategic skillsUnderstanding business conditions
30 Assessing & Improving Firm’s Purchasing Function (Continued) Assessment criteria include –Participating in and leading multifunctional teamsParticipate in value engineering effortsOptimize supply baseCreate ESI initiativesUtilize e-procurementFurther supplier integrationContribute to new product developmentImprove time to marketInitiate supplier cost reduction programsCreation of strategic alliances