1. Chapter 6
Sourcing

2. Lecture Outline What is Sourcing? The Sourcing Function
Sourcing and SCM
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3. What is Sourcing?
Sourcing is the business function responsible for all activities and processes required to purchase goods and services from suppliers
select suppliers
negotiate contracts
manage process of acquisition
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5. Related Terms Purchasing Strategic Sourcing
process of buying goods and services
supplier selection, buying, negotiating contracts
Strategic Sourcing
seeks competitive advantage with sourcing opportunities
builds supplier relationships
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7. Evolution of the Sourcing Function
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8. Consumer vs. Commercial Sourcing
many suppliers
buyer is final customer
small portion of supplier’s total business
little ability to negotiate
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9. Consumer vs. Commercial Sourcing Continued
larger volumes purchased
very specialized purchasing needs
number of suppliers may be limited
large sums of money
often imbalance of power
buying contracts
legal, ethical, environmental, security concerns
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10. Impact on the Organization
Operational Impact
right materials, right quantities, right place, right time
optimal inventory balance
Financial Impact
sourcing spends 50% - 90% of revenue in most manufacturing organizations
large sums of money  can have huge savings impact
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11. Impact on the Organization Continued
Strategic Impact
support organization’s strategic direction
Risk Mitigation
minimize supply disruptions and protect reputation
ensure suppliers meet performance standards
Information Impact
collect information on prices, suppliers, goods, new products and technologies
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12. Sourcing Process Supplier Selection Negotiate Contracts
Existing vs. New Suppliers
Request for Quotation (RFQ), Request for Proposal (RFP), Request for Bid (RFB)
Negotiate Contracts
Manage Process of Acquisition
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13. Sourcing Process Continued
It is important for supplier management to be directed through the sourcing function
combine requests from different users for same materials to lower costs
seek input from other functions of organization
understand material requirements to meet performance standards
“Maverick buying”
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14. Total Cost = Fixed Costs + Variable Costs
Cost vs. Price
Cost
sum of all costs incurred to produce the product
Total Cost = Fixed Costs + Variable Costs
Fixed Costs
do not vary with # units produced
taxes, insurance, overhead
Variable Costs
vary directly with # units produced
materials, labor
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15. Cost vs. Price Continued
the amount at which the item is sold in the marketplace
Fair Price
lowest price that can be paid while ensuring a continuous supply of quality goods
Total Cost of Ownership (TCO)
purchase price plus all other costs associated with acquiring the item
Copyright 2011 John Wiley & Sons, Inc.

16. Cost vs. Price Example Variable Cost Materials $5,000 Labor $2,000 +
Fixed Cost
Facility Overhead
$3,500
Total Cost (not TCO)
$10,500
Profit
$1,000
Selling Price
$11,500
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17. Bidding or Negotiation?
Sourcing function determines how to award contracts
Competitive Bidding
awards business to the most qualified bidder
most efficient for purchasing standard items
Negotiation
communication process between two parties that attempts to reach a mutual agreement
best when working with suppliers on factors beyond the purchase
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18. Bidding or Negotiation?
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19. Demand Uncertainty
Supply chain demand uncertainty varies depending on the type of product sourced
Two Categories of Products:
Functional (low demand uncertainty)
Innovative (high demand uncertainty)
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20. Functional Products satisfy basic functions or needs
stable and predictable demand
long life cycles
supply chains are easy to manage
low profit margins
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21. Innovative Products purchased for innovation or status
highly unpredictable demand
short life cycles
supply chains are more difficult to manage
higher profit margins
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22. Supply Uncertainty
Supply chain supply uncertainty can be classified as:
Stable (low supply uncertainty)
Evolving Process (high supply uncertainty)
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23. Stable Supply Process low supply uncertainty
mature manufacturing processes
underlying technology is stable
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24. Evolving Supply Process
high supply uncertainty
manufacturing process in early stage
underlying technology is quickly evolving
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25. Types of Supply Chains Efficiency-focused Responsive Risk-hedging
low demand and supply uncertainty
Responsive
innovative products with stable supply base, mass customization
Risk-hedging
high supply uncertainty, high safety stocks, resource pooling
Agile
high demand and supply uncertainty
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27. Multiple vs. Single Sourcing
Multiple Sources of Supply
traditionally considered best
increases competition
ensures supplier security
arms-length relationship with buyer
can result in variations between sources
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28. Multiple vs. Single Sourcing Continued
Single Source of Supply
becoming the norm
focus on building close, long-term relationship
cooperative negotiation
lower freight costs
easier scheduling
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29. Global vs. Domestic Sourcing
Global Sourcing
also called “off-shoring”
takes advantage of cheaper labor
prominent with products with easily defined standards
higher fuel costs result in high transportation costs
virtual teaming can result in culture clashes and misunderstandings
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30. Global vs. Domestic Sourcing
reduces transportation costs
can monitor quality more closely
closer buyer-supplier relationships
the emphasis on sustainability and “green” has resulted in a push toward local sourcing
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31. Outsourcing Companies may outsource to: Two Key Dimensions: Scope
access technical skills
lower costs
free themselves of doing non-core activities
Two Key Dimensions:
Scope
degree of responsibility assigned to the supplier
Criticality
importance of the outsourced activities
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32. Dimensions of Outsourcing
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33. Electronic Auctions
Buyers can use Electronic Auctions (E-Auctions) to select suppliers and determine aspects of the purchase contract
Look at:
Advantages and Disadvantages
Types of E-Auctions
Criteria for Use
Three Stages of the E-Auction Process
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34. Advantages of E-Auctions
simplified comparison of supply sources
decreased error rate
market transparency
increased buying reach
reduction in ordering cycle time
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35. Disadvantages of E-Auctions
unrealistic low bidders seek to renegotiate after contract is awarded (may eliminate better suppliers)
auction may include nonparticipants seeking to gather market intelligence
may interrupt an existing good supplier relationship
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36. Types of E-Auctions Open Auction Sealed Bid Auction Reverse Auction
suppliers can select items to place offers on
suppliers can see competitive offers
suppliers can keep submitting offers until close
Sealed Bid Auction
sellers submit one blind bid
Reverse Auction
one buyer and many sellers
most common type
sellers place decreasing bids
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37. E-Auction Criteria E-Auctions should have:
specifications for goods or services well defined
sufficient number of qualified suppliers
clear understanding of market standards
clear rules for running the E-Auction
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38. Three Stages of E-Auction Process
Preparation
set product requirements
identify and prequalify suppliers
specify auction rules
test and train participants on technology
The Auction Event
communication between suppliers and seller
Follow-up
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39. Measuring Sourcing Performance
Inventory Turnover and Weeks-of-Supply are two common performance measures of the sourcing function
Inventory Turnover
measures how quickly inventory moves
Inventory Turnover =
Cost of Goods Sold
Average Inventory Value
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40. Inventory Turnover Example
Jenco Inc. produces dolls. Annual cost of goods sold is $8,000,000 and average inventory is $2,000,000. What is the annual inventory turnover? Inventory Turnover = = = 4 inventory turns/year
Cost of Goods Sold
Average Inventory Value
$8,000,000
$2,000,000
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41. Measuring Sourcing Performance Continued
Weeks-of-Supply
provides the length of time demand can be met with on-hand inventory
Weeks of Supply =
Average On-Hand Inventory
Average Weekly Usage
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42. Weeks of Supply Example
Jenco Inc. has an annual cost of goods sold of $8,000,000 and average inventory is $2,000,000. How many weeks of supply are on-hand? Weeks of Supply = = = 13 weeks of supply
Average On-Hand Inventory
Average Weekly Usage
2,000,000
$8,000,000/52
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43. Review
Sourcing is the business function responsible for all activities and processes required to purchase goods and services from suppliers.
Terms such as “purchasing,” “strategic sourcing,” and “supply management” are used interchangeably but are not the same. Purchasing defines the process of buying goods and services, whereas strategic sourcing, or supply management, involve looking at sourcing from a strategic and future oriented perspective.
The sourcing function provides a number of critical roles for the organization. These are operational impact, financial impact, strategic impact, risk mitigation impact, and information impact.
Copyright 2011 John Wiley & Sons, Inc.

44. Review Continued
The sourcing process involves every aspect of acquiring goods and services, ranging from identifying potential suppliers to negotiating and awarding contracts, and ensuring contract standards are met.
Competitive bidding and negotiation are two different methods used to reach agreement and develop contracts with suppliers.
Products can be classified as either primarily functional or primarily innovative. Depending on their classification, they will be sourced differently and require different types of supply chains.
Copyright 2011 John Wiley & Sons, Inc.

45. Review Continued
Outsourcing engagements can be classified based on scope and criticality of outsourced tasks.
E-auctions are the use of Internet technology to conduct auctions as a means of selecting suppliers and determining aspects of the purchase contract.
Inventory turnover and weeks of supply are two metrics that can be used to measure performance of the sourcing function.
Copyright 2011 John Wiley & Sons, Inc.

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