Trends in supplier selection In the past: supplier selection should be purchasing’s domain Now: necessary to bring together organizational resources outside and inside of the supply area to achieve sound supplier choices –fewer suppliers –long-term contracts –EDI –continuing improvement in quality, price, and services

Fewer suppliers and closer relationships Extensive communication and cooperation over a long period of time New suppliers are expensive, and take a period of learning Going for the lowest cost suppliers? Supply linkInternal linkCustomer link

Make or buy? Issues: –Increasing global competition –Pressure to reduce costs –Downsizing –Focus on the firm’s core competencies Moving toward outsourcing!

Why make? Capture all the added-value Full control Purchase is limited to raw material Backward integration and full ownership

Why buy? Flexibility Focus on corporate strength Closeness to customers Emphasis on productivity and competitiveness Can you excel in all aspects in manufacturing and services?

Decision on outsourcing Manufacturing: Services:

Reasons for make instead of buy The quantity is too small and no supplier is interested in providing the goods Quality requirements may be so unusual as to require special processing methods that suppliers cannot provide To preserve technological secrets To obtain a lower cost To take advantage of idle equipment or labor

Reasons for make instead of buy To ensure steady running of the corporation’s own facilities; leaving the suppliers to bear the burden of fluctuation in demand To avoid single-source dependency Political issues Emotional reasons

Reasons for buying outside The organization may lack administrative or technical experience in the production of the items or services Limited capacity Supplier has a reputation for their components which are demanded by the customers The challenge of maintaining a long-term technological and economical viability for a non-core activity A decision to make is difficult to reverse

Reasons for buying outside Difficult to justify the true long-term costs of the make decision More flexibility in selecting sources and substitute items Firms have to determine where the value added activities are and how to distinguish themselves Superior supply management expertise Less overhead

The gray zone of make or buy To what extent do I buy or make?

Control involved Cost control –Negotiation of a reasonable cost –Proper choice of the contract type –Imposed incentives Schedule control –Develop a good master schedule that covers all necessary activities –Good report system and recovery programs

Control involved Technical control –The end product conforms to the performance requirements Configuration control –All changes are documented –Essential to after-market services and spares

Outsourcing Urge to downsize and focus on value added activities and core competencies Outsource entire function or elements –What should be kept in-house? IS function outsource market: $50 billion Contract logistics industry: $50 billion in annual revenue in 2000

Outsourcing in logistics Transportation deregulation Focus on core competencies Reduction in inventory Enhanced logistics management computer programs Just-in-time requires highly accurate delivery and information

Drawbacks of outsourcing Human issues (layoffs) Union relationships Control issues (partnership, strategic alliance)

Reasons for outsourcingRisk of outsourcing Cost reduction Less labor Focus on core competencies Acquire knowledge or process technology Minimize inventory, material handling, and other non-value-added activities Reduce development and production cycle time Improve efficiency Loss of control Higher exit barriers Exposure to supplier risks: financial strength, loss of commitment, slow implementation, lack of responsiveness, poor quality Unexpected charges Supply restriction Attention from senior management Possibility of being tied to old technology Concerns with long-term flexibility and meeting changes

What’s to be outsourced? Human resource Data entry Training Maintenance Manufacturing R&D Software development Web function