1. Rusiri T Wijeyaratne B.Sc. Eng.(Mora), MBA(Sri J ), MIET(UK)
Sourcing in Supply Chain Supplier Development/ Strategic Supplier Selection
Rusiri T Wijeyaratne
B.Sc. Eng.(Mora), MBA(Sri J ), MIET(UK)

2. The Role of Sourcing in a Supply Chain
Sourcing is the set of business processes required to purchase goods and services
In House
Outsourcing
Offshoring

3. Basic Steps for Sourcing

4. Supplier Scoring and Assessment
Supplier performance should be compared on the basis of the supplier’s impact on total cost
There are several other factors besides purchase price that influence total cost
Lead time
Quality
Reliability
Design capability

5. Supplier Selection Identify one or more appropriate suppliers
Contract should account for all factors that affect supply chain performance
Should be designed to increase supply chain profits in a way that benefits both the supplier and the buyer

6. Design Collaboration
About 80% of the cost of a product is determined during design
Suppliers should be actively involved at this stage

7. Design Collaboration
50-70% of spending at a manufacturer comes from procurement
80% of the cost of a purchased part is fixed in the design phase
Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market
Design for logistics, design for manufacturability
Modular, adjustable, dimensional customization

8. Procurement
A supplier sends product in response to orders placed by the buyer
Orders placed and delivered on schedule at the lowest possible overall cost

9. The Procurement Process
The process in which the supplier sends product in response to orders placed by the buyer
Main categories of purchased goods
Direct materials
Indirect materials
Procurement process for direct materials should be designed to ensure that components are available in the right place, in the right quantity, and at the right time
Focus for indirect materials should be on reducing transaction cost

10. Differences Between Direct and Indirect Materials
Use
Production
Maintenance, repair, and support operations
Accounting
Cost of goods sold
Selling, general, and administrative expenses (SG&A)
Impact on production
Any delay will delay production
Less direct impact
Processing cost relative to value of transaction
Low
High
Number of transactions
Table 15-7

11. Sourcing Planning and Analysis
Analyze spending across various suppliers and component categories
Identify opportunities for decreasing the total cost

12. Supplier relationship management
Relationship arrangements
Archetypes; legal relationships
Supplier selection, participation & training

13. Cost of Goods Sold
Cost of goods sold (COGS) represents well over 50 percent of sales for most major manufacturers
(increase in purchasing costs)
Purchased parts a much higher fraction than in the past
Companies have reduced vertical integration and outsourced

14. Benefits of Effective Sourcing Decisions
Better economies of scale through aggregated
More efficient procurement transactions
Design collaboration can result in products that are easier to manufacture and distribute
Good procurement processes can facilitate coordination with suppliers
Appropriate supplier contracts can allow for the sharing of risk
Firms can achieve a lower purchase price by increasing competition through the use of auctions

15. The Role of Sourcing in a Supply Chain
Outsourcing questions
Will the third party increase the supply chain surplus relative to performing the activity in- house?
How much of the increase in surplus does the firm get to keep?
To what extent do risks grow upon outsourcing?

16. In-House or Outsource? Increase supply chain surplus through
Capacity aggregation
Inventory aggregation
Transportation aggregation by transportation intermediaries
Transportation aggregation by storage intermediaries
Warehousing aggregation
Procurement aggregation
Information aggregation
Receivables aggregation
Relationship aggregation
Lower costs and higher quality

17. Third- and Fourth-Party Logistics Providers
Third-party logistics (3PL) providers performs one or more of the logistics activities relating to the flow of product, information, and funds that could be performed by the firm itself
A 4PL (fourth-party logistics) designs, builds and runs the entire supply chain process
The concept of a 4PL provider is an integrator that accumulates resources, capabilities and technologies to run complete supply chain solutions. Main Difference between 3PLs and 4PLs. The 3PL targets a single function, whereas the 4PL manages the entire process. A 4PL may manage the 3PL.

18. Factors Influencing Growth of Surplus by a Third Party
Scale
Large scale it is unlikely that a third party can achieve further scale economies and increase the surplus
Uncertainty
If requirements are highly variable over time, third party can increase the surplus through aggregation
Specificity of assets
If assets required are specific to a firm, a third party is unlikely to increase the surplus

19. Risks of Using a Third Party
The process is broken
Underestimation of the cost of coordination
Reduced customer/supplier contact
Loss of internal capability and growth in third- party power
Leakage of sensitive data and information
Ineffective contracts
Loss of supply chain visibility
Negative reputational impact

20. Supplier Selection – Auctions and Negotiations
Supplier selection can be performed through competitive bids, reverse auctions, and direct negotiations
Supplier evaluation is based on total cost of using a supplier
Auctions:
Sealed-bid first-price auctions
English auctions
Dutch auctions
Second-price (Vickery) auctions
The English auction is also known as an open-outcry ascending-price auction. In the English auction, the price is successively raised until only one bidder remains, and that bidder purchases the auctioned item at a price equal to the final bid. The initial price is the reservation price.
A Dutch auction is a type of auction in which the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price (the seller's minimum acceptable price) is reached. The winning participant pays the last announced price. This is also known as a clock auction or an open-outcry descending-price auction.A Vickrey auction is a type of sealed-bid auction. Bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid.

21. Supplier Selection – Auctions and Negotiations
Factors influence the performance of an auction
Is the supplier’s cost structure private (not affected by factors that are common to other bidders)?
Are suppliers symmetric or asymmetric; that is, ex ante, are they expected to have similar cost structures?
Do suppliers have all the information they need to estimate their cost structure?
Does the buyer specify a maximum price it is willing to pay for the supply chain?

22. Supplier Selection – Auctions and Negotiations
Collusion among bidders
Second-price auctions are particularly vulnerable
Can be avoided with any first-price auction

23. Basic Principles of Negotiation
The difference between the values of the buyer and seller is the bargaining surplus
The goal of each negotiating party is to capture as much of the bargaining surplus as possible
Have a clear idea of your own value and as good an estimate of the third party’s value as possible
Look for a fair outcome based on equally or equitably dividing the bargaining surplus
A win-win outcome

24. Preparation is key
"Before everything else, getting ready is the secret to success“
- Henry Ford

25. Different negotiation methods
Yes
Bargaining
Dynamic bidding
Starting position combined with at least one round of refinement possibility, without visibility across potential competitors
Example: Face-to-face negotiation
Interaction, variability, and lack of transparency creates movement
Multi-round, multi-party, with visibility on relative position towards competition prior to decision
Example: Iterative RFQ feedback, E-reverse auction
Transparency creates movement
Opportunity for suppliers to refine offer before conclusion
One-bid/best-bid
Forced acceptance
Request for a bid on which basis a selection decision is made
Example: sealed bid with no option to reposition offer
Lack of transparency and one-go opportunity creates movement
Acceptance of a given market price forced
Example: London Metal Exchange
Higher level market dynamics drive movement, but not the individual deal
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ No No
Yes
Provided transparency of offers (their position) across suppliers

26. Required knowledge to prepare for successful negotiations
Knowledge of supply markets
Market dynamics (monopoly vs. competitive)
Market price evolution
Understand the value chain – e.g. be aware of suppliers’ suppliers
Knowledge of supplier economics
Cost development
Supplier margins and development
Suppliers main cost drivers e.g., capacity utilization, fixed vs. variable etc.
Knowledge of bids and TCO
Know how to trade off different aspects of negotiation (value drivers)
Understand total cost for category and main drivers
Understand their bid in relation to other bids and potential benchmarks

27. Understand own attractiveness to suppliers
CONCEPTUAL
High
Important to understand own position in matrix in order to predict suppliers‘ behavior and willingness to make concessions
Level of attractiveness directly impacts negotiation strategy and potential levers
Development
Core
Account attrac-tiveness
Nuisance
Exploitable
Low
Low
High
Relative value of deal/business

28. 8,1
Understand the levers beyond the current scope that could “motivate” the other side ? ?
“Carrots”
Which value generating offers can be made towards the other side? ? ?
“Sticks”
Which potential threat-elements do exist?
For our side
For the other side

29. Preparation is key "Luck favors the mind that is prepared“
- Louis Pasteur

30. Fact-based ways to establish a negotiation target
0.49
Fact-based ways to establish a negotiation target
Overall price not competitive
Your total cost would need to be reduced with X% to be competitive on an overall level
Certain price points not competitive
You are X% more expensive on Y (Best-Of-Best)
Compare with similar products
Compared with product X you are X% too expensive. I do not understand difference. (LPP-analysis*)
Associated running costs
Your solution would require additional running costs and we need a contribution to compensate for this
Associated one-off costs
Your solution would cost X to implement, which we need compensation for
Category margin
Category margin vs avg margin: on a %-margin basis you are X% behind
Category growth
Growth is underperforming average growth, you need to decrease prices with X to compensate
Gross margin
“Your” category is underperforming the average with X%, you need to improve
Raw material prices
Raw material prices: prices have decreased with X%, we want an Y% price decrease
Quality/performance
You are bad performing in terms of X, causing us extra cost that we need compensation for
* Linear Price Performance: Comparing price of different similar products with one changing parameter e.g., engine size 30 30

31. Checklist before completing negotiations
Getting the facts
Preparing the meeting
We understand the product
Minimum requirements
Wanted/nice to have requirements
We know the market dynamics and our options
Supply dynamics, e.g. monopoly vs. competitive market
Local vs. global market
Other market specific elements of relevance
We know the supplier intrinsic (for each supplier)
Our share/potential share of their business
Margin development (e.g. EBIT, %)
Supplier reference clients
Supplier objectives, e.g. reference clients needed, growth focus etc.
Supplier economics
Understanding the quote/offer received and its competitiveness to other bids
Price competitiveness to other bids, benchmarks and clean sheet estimates
Product/service quality including delivery and potential gaps
TCO
Analyze roles and relationships
Develop presentation material for negotiation
Agenda – “Own the agenda”
Purpose – Clear purpose of the meeting
Analyses
Backups
Plan for negotiations, e.g. timeline and number of meetings
The next steps in the process
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32. Preparation is key
"No man ever reached to excellence in art or profession without having passed through the slow and painful process of study and preparation “
- Horace Mann

33. Contracts, Risk Sharing, and Supply Chain Performance
How will the contract affect the firm’s profits and total supply chain profits?
Will the incentives in the contract introduce any information distortion?
How will the contract influence supplier performance along key performance measures?

34. Product Categorization
Figure 15-2

35. Designing a Sourcing Portfolio: Tailored Sourcing
Options with regard to whom and where to source from
Produce in-house or outsource to a third party
Will the source be cost efficient or responsive
On-shoring, near-shoring, and offshoring
Tailor supplier portfolio based on a variety of product and market characteristics

36. Designing a Sourcing Portfolio: Tailored Sourcing
Responsive Source
Low-Cost Source
Product life cycle
Early phase
Mature phase
Demand volatility
High
Low
Demand volume
Product value
Rate of product obsolescence
Desired quality
Low to medium
Engineering/design support
Factors favoring
Table 15-8

37. Designing a Sourcing Portfolio: Tailored Sourcing
Onshore
Near-shore
Offshore
Rate of innovation/product variety
High
Medium to High
Low
Demand volatility
Labor content
Volume or weight-to-value ratio
Impact of supply chain disruption
Inventory costs
Engineering/management support
Table 15-9

38. Risk Management in Sourcing
Inability to meet demand on time
An increase in procurement costs
Loss of intellectual property

39. Making Sourcing Decisions in Practice
Use multifunction teams
Ensure appropriate coordination across regions and business units
Always evaluate the total cost of ownership
Build long-term relationships with key suppliers