1. Ethical and Sustainable Sourcing
Chapter 4
Ethical and Sustainable Sourcing
Prepared by Mark A. Jacobs, PhD
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

2. Learning Objectives You should be able to –
Describe the difference between purchasing and strategic sourcing
Describe how strategic sourcing plans are developed and implemented
Define and describe the terms green sourcing, VMI, JIT II, in-sourcing, co-sourcing, and co-managed inventories
Describe sourcing’s role in managing key supplier relationships
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3. LEARNING OBJECTIVES (Continued)
You should be able to –
Describe the performance criteria used in assessing suppliers.
Describe how strategic supplier relationships can impact the firm.
Describe how a reverse auction works.
Understand the importance of sharing the benefits of strategic partnerships.
Understand the strategic role played by the purchasing function in developing & improving the supply chain. 3
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4. Chapter Outline Introduction Ethical and Sustainable Sourcing
Developing Ethical and Sustainable Sourcing Strategies
Supply Base Rationalization Programs
Ethical and Sustainable Supplier Certification Programs
Outsourcing Products & Services
Early Supplier Involvement
Strategic Alliance Development
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

5. CHAPTER OUTLINE (Continued)
Use of e-Procurement Systems
Rewarding Supplier Performance
Benchmarking Successful Sourcing Practices
Using Third-Party Supply Chain Management Services
Assessing & Improving the Firm’s Sourcing Function 5
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6. Introduction
Sourcing - 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 Sourcing
Reduce costs & delivery cycle times
Improve quality & long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce 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 business
Corporate Social Responsibility is the practice of business ethics
Ethical 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 made
Knowledge of the suppliers’ workplace principles
Inclusion of ethics as a performance rating
Independent verification of vendor compliance
Report of supplier compliance to stakeholders
Provision 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 recycling
Sustainability 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 challenges
Considers worker safety, wages, working conditions, human rights

10. Ethical and Sustainable Sourcing Strategies (Continued)
Sustainable Sourcing should seek to –
Grow revenues
New sustainable product introduction
Reduce costs
Increase resource efficiencies
Manage risk
Link brand to social consciousness of consumer
Build intangible assets
Build 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 competition
Innovative 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 strategies
Step 2 – Train purchasing staff and implement policies
Step 3 – Prioritize items based upon ethical and sustainability opportunities and ease of implementation
Step 4 – Develop performance measurement system
Step 5 – Monitor progress and make improvements. Increase use of green and fair trade products
Step 6 – Expand focus to include other departments

13. Ethical and Sustainable Sourcing Strategies (Continued)
Ethical and Sustainable Framework
Step 1: Establish policies
Step 2: Train and implement
Step 3: Prioritize opportunities
Step 4: Develop performance measurement systems
Step 5: Monitor progress and make improvements
Step 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 effort
Buyer-supplier partnerships are easier with a rationalized supply base & result in –
Reduced purchase prices
Fewer supplier management problems
Closer & more frequent interaction between buyer & supplier
Greater levels of quality & delivery reliability

15. Ethical and Sustainable Supplier Certification Programs
Supplier certification programs are used to identify strategic supplier alliance candidates
Firms use in-house formal certification programs, & most require ISO 9000 / or similar certifications as part of the certification process
Buyers 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 capabilities
Reduce staffing levels
Accelerate reengineering efforts
Reduce management problems
Improve manufacturing flexibility.
Risks associated with outsourcing, include –
Loss of control
Production decisions & intellectual property
Increased reliance on suppliers
Increased 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 expectations
Co-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 techniques
Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniques
Value 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 buyer
From the buyer-firm’s perspective –
Supplier tracks inventories
Determines delivery schedules and order quantities
Buyer can take ownership at stocking location
From the supplier’s perspective –
Avoids ill-advised customer orders
Supplier decides inventory set up & shipments
Opportunity 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 forecasts
EDI also provides reorder point data to permit timely deliveries
Supplier co-location or JIT II
Supplier’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 investment
Alliance 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 result
Requires open discussions and a free-flow of information between parties
Distributive negotiations –
Refers to a process that leads to self-interested, one-sided outcome

23. Negotiating Win-Win Strategic Alliance Agreements (Continued)
Steps
Description
1. Build preparation process
Gain an understanding of both parties’ interests; brainstorm value-maximizing solutions; identify objective criteria to evaluate fairness of agreement.
2. Develop negotiation database
Review previous negotiations to catalogue standards, practices, precedents, metrics, creative solutions used, and lessons learned.
3. Design negotiation launch process
Create an environment to work together to create a shared vocabulary, build working relationships, and map out a shared decision-making process.
4. Institute feedback mechanism
Create 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 savings
Frees-up time to concentrate on core business
e-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 goals
Punishment 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 quality
Strategic supplier agreements can reward suppliers by allowing –
A share of the cost reductions
More business and/or longer contracts
Access to in-house training seminars & other resources
Company & 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 responsibilities
3PL 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 organization
It 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 communication
Ability to make decisions
Ability to work in teams
Analytical skills
Negotiation skills
Customer focus
Ability to manage change
Influencing & persuasion skills
Strategic skills
Understanding business conditions

30. Assessing & Improving Firm’s Purchasing Function (Continued)
Assessment criteria include –
Participating in and leading multifunctional teams
Participate in value engineering efforts
Optimize supply base
Create ESI initiatives
Utilize e-procurement
Further supplier integration
Contribute to new product development
Improve time to market
Initiate supplier cost reduction programs
Creation of strategic alliances