1. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 1 Future Development in Global Sourcing and Logistics 26.09.2011 - 27.09.2011 Professor Dr. Dr. h.c. Ulli Arnold University of Stuttgart ulli.arnold@bwi.uni-stuttgart.de

2. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 2 Agenda 1.The Concept of Global Sourcing 2.Barriers to Worldwide Sourcing 3.Organisational Buying Behaviour 4.Global Sourcing Analysis 5.Organisation of Global Sourcing 6.Sourcing Strategies 7.Vertical and Horizontal Cooperation 8.Sourcing Processes 9.Controlling of Procurement 10.Logistics as an Enabler 11.Supply Chain Management

3. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 3 Chapter 1 The Concept of Global Sourcing

4. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 4 Increase of environmental and social responsibility Corporate Social Responsibility will be of greater importance as organizations face changes in consumption patterns with regards to green, social and health Demographic change will be highly impact availability of skilled and also low cost labor Demand in traditional industries (and mature markets) will slow down, but developing markets will experience strong growth Information technologies and innovations will become a key success factor Fundamental market changes will be more frequent and access to raw materials will become more critical 1. Global mega trends

5. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 5 (Source: WTO, International Trade Statistics 2007) 2000 - 2006 1. Structure and development of the world trade capacity

6. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 6 World trade flows Selected intra- and inter-regional merchandise trade flows, 2006 (Source: WTO, International Trade Statistics 2007) 1. Structure and development of the world trade capacity

7. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 7 (Source: WTO, International Trade Statistics 2007) Logarithmic scale 1. Structure and development of the world trade capacity World exports of goods (detailed), 2000-2006

8. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 8 World exports of goods and commercial services, 2000-2006 World commercial services exports by category, 2000 and 2006 (Source: WTO, International Trade Statistics 2007) 1. Structure and development of the world trade capacity

9. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 9 Activities Domestic Production Indirect Imports Direct Imports Overseas Production No Direct Investment Direct Investment Joint Venture Own Production International Production Coordination Management Contract (Sourcing) Contract Production (Supply) Licensing (Sourcing Consulting) 1. Sourcing Tasks in International Business Activities

10. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 10 What is Global Sourcing? The business process of identifying, evaluating, negotiating and configuring supply chains across multiple suppliers and geographies Common reasons for Global Sourcing –Reducing overall cost structure –Availability of new technology and capacity. Often domestic suppliers lack capacity and / or are not making the necessary investments to stay competetive –Establishing alternative sources of supply- reduced risk –Access to new designs or specialized intellectual capital –Superior quality. This is typically due to supplier investment in technology and capacity to attract global businesses 1. Global Sourcing - Definition

11. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 11 Chapter 2 Barriers to Worldwide Sourcing

12. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 12  Economical barriers e.g. Tarriffs, duties, hidden costs  Political conditions e.g. Legal system, political stability, protectionism etc.  Cultural conditions e.g. flexibility, values, openness etc. 2. Barriers to World Wide Sourcing

13. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 13  total cost in international purchasing is also called landed costs  international purchasing may include many additional cost components compared with domestic purchasing: 2. Barriers to World Wide Sourcing (economical) o Packaging o Transportation o Duties/ Tarifs o Insurance premiums o Payment terms o Fees and commissions o Port terminal and handling fees o Custom broker fees o Taxes o Communication costs o Payment and currency fees o Inventory carring costs

14. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 14 a)Contractual trade barrier: Duty, dues fiscal policy to suppress foreign provider b)Non-contractual barriers : - building specifications- national safety regulations - terms of use- ecological demand c)Currency control: Contrary: complete convertibility of the currency d)Laws/restrictions: - Kriegswaffenkontrollgesetz- Narcotics law e)Industrial policy - grants- export promotions - risk taking Trade and currency policy 2. Barriers to World Wide Sourcing (political) State/ Suprastates foreign trade regimes

15. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 15 (members) Africa : 1. Communaute Economique de l´Afrique de l´Quest (7) 2. Communaute Economique de Pays des Grans Lacs (3) 3. Economic Community of West African States (16) 4. Indian Ocean Commission (5) 5. Mano River Union (3) 6. Preferential Trade Area for Eastern and Southern Africa (18) 7. Southern African Customs Union (4) 8. Southern African Development Coordination Conference (10) 9. Union Douaniere et Economique de l´Afrique Centrale (6) Asia und Pacific: 10. Australia-New Zealand Closer Economic Relations Trade Agreement (2) 11. Association of South Asian Nations (ASEAN) (5) 12. Asiatic Pacific Economic Cooperation (APEC) (18) Middle East: 13. The Arab Common Market (7) 14. Economic Cooperation Organization (3) 15. Gulf Cooperation Council (6) North and South america: 16. North America Free Trade Area (NAFTA) (3) 17. Andean Pact (5) 18. Central American Common Market (5) 19. Caribbean Community (13) 20. Mercosur (4) Free trade zones ordered by regions 2. Barriers to World Wide Sourcing (political)

16. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 16 (Source: unctad.org) Free trade zones in Africa 2. Barriers to World Wide Sourcing (political)

17. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 17 Transparency International – Corruption Perception Index 2009 (1) 2. Barriers to World Wide Sourcing (cultural)

18. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 18 Transparency International – Corruption Perception Index 2009 (2) 2. Barriers to World Wide Sourcing (cultural) The Corruption Perception Index(CPI) is published since 1995. In the CPI every country is classified for their degree of corruption, percieved by the governement and civil service. The CPI is based on several surveys and research from different independent institutions. (Source: www.transparency.ch)

19. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 19 Chapter 3 Organisational Buying Behaviour

20. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 20 Organizational procurement process Characteristics of the procuring organization Buying Center/ Buying Network Purchase type Environment Selling Center/ Selling Network N A K 3. Organisational Buying Behaviour

21. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 21 Multi-personality Problem-solving and decision-making process Active information behavior Intensive personal interactions Organizational purchasing behavior takes place in a multi-personal problem-solving and decision-making process that is characterized by interactive information and behavior through frequent interactions. 3. Organisational Buying Behaviour

22. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 22 Buying-Center: Theoretical summary of the decision making unit The idea of the Buying-Center Problem-oriented group of interacting members within an organisation, the group is established for purchasing an industrial good. The Buying-Center is often institutionally established in „investement comissions“ Problem for suppliers: Who is involved at which time and with which part in decisions (identification according to persons/ roles / functions)? The range (number of participants) and the structure cannot be defined precisely. Marketingimplication for the provider: Analysing the range and structure of the Buying-Center. Source: Backhaus/Voeth, 2007, S. 46-75 3. Buying Center Concepts

23. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 23 Purchase decision Buyer User Decider Gatekeeper Influencer 3. Buying Center Concept (Webster/Wind)

24. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 24 The rolemodel is widened by Bonoma with the role of an initiator Witte`s promoter-/ opponent-model –Subject- and powerpromoter –Subject- and poweropponent  Promoter-Team 3. Buying Center Concept (Extension according to Bonoma)

25. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 25 Buying-Center Opponents Decision behaviour Promoters Information behaviour Handicap and delay decision processes Differentiation into : Power opponents Knowledge opponents Risk behaviour steers decision behaviour 1. Decision oriented 2. Fact oriented 3. Security oriented Types of information treatment: 1.Facts-reactor 2.Image-reactor 3.Neutral reactor Types of information serach behaviour: 1.literal-scientifical 2.Objective- evaluative 3.Spontaneous/ passive Promote and influence the purchasing process Differentaiotion into: -Subject promoters -Power promoters 3. Structure of power and behaviour in buying-centers

26. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 26 High hierarchic position Competence of experts Organisational skills Internal organisational potentials of communication Provides organisational resources Defines goals Grants incentives Sanctions actors Blocks opponents Evaluates new und complex problems Evaluates und develops solutions Realises solutions Initiates and promotes specific subject didactic processes Collects, filters, translates and interprets informations und forwards them to according actors Promotes communication relationship und coalitions among actors Will barriers Hierarchy barrierrs Subject oriented skill barriers Organisational and administrative barriers Sources of power Performance Barriers Power promoter Subject promoter Process promoter 3. The promoters and opponnents model

27. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 27 Chapter 4 Global Sourcing Analysis

28. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 28 Market attractiveness Market barriers high low high Target markets Occasional markets Promising markets No Go markets (Source: Backhaus et al., 2003, S. 124-125) All considered markets are being evaluated for their market attractiveness and market barriers. Afterwards a matrix- structure is beeing set-up. Based on that structure four market types can be differentiated. Portfolio approach 4. Selection of sourcing countries

29. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 29 (Source: Albaum/ Duerr/ Strandskov, 2005, S. 188) Portfolio approach 4. Selection of sourcing countries

30. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 30 BERI-Index (1) Established1966; Headquarters in Friday Harbor, State of Washington, U.S.A Evaluates country specific risks in a multidimensional model One year and five year forecast Examines 50 countries Two simultaneous panels examining political and economic conditions (Source: www.beri.com, 2010)  Business Environment Risk Information (BERI) 4. Selection of sourcing countries

31. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 31 ORI Operation Risk Index PRI Political Risk Index R-Factor Remittance & Repatriation Factor Final Evaluation consists of the aggregation of three subindizes: (Source: www.beri.com/brs.asp, 2010) BERI BERI-Index (2) 4. Selection of sourcing countries

32. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 32 Chapter 5 Organisation of Global Sourcing

33. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 33 5. Centralization vs. decentralization Structural alternatives in an overview: Realizing supply economies of scale, economies of process, economies of information high low high Homogeneity of demand Degree of centralization decentralized structure mix of centralized and decentralized (lagrest $ volume decentralized) mix of centralized and decentralized (lagrest $ volume centralized) centralized structure supply economies of scale supply economies of process and information hierarchical coordination hybrid coordination market coordination

34. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 34  What do International Purchasing Offices (IPOs) do to support international purchasing o Identify foreign suppliers o Solicit quotes o Expedite and trace shipments o Negotiate supply contracts o Obtain product samples o Manage technical problems o Represent the buying firm to the suppliers o Manage countertrade o Perform site visits 5. International Purchasing Offices

35. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 35 Independent Dependent Complexity of Business Environment Dynamics in Purchasing Environment Importance of International Purchasing Lack of Alternative Source Situational Factors Cost Driven Non-cost Driven International Purchasing Motives Extent of International Supply Base/Program Value-Adding Services Provided by International Suppliers Worldwide Information Systems Level of IPS E-Commerce Capabilities of Purchasing Personnel 5. Determinants of the International Purchasing System (IPS)

36. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 36 Ultimate Customers Distributor Partners Logistic Partners Sourcing Firm Logistics Partners Supplier Partners Supplier Suppliers‘ 5. Structural Relationship in a Strategic Network

37. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 37 Virtual Organization DesignerProducer Marketer Supplier 5. Structure of a virtual organization

38. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 38 Lead Buyer coordinates product / product group Supported by Regional Buyers Each product / product group with dedicated strategy Lead buyer system for Product Focus Groups Lead Buyer System (Source: Britt, 2011) 5. Lead Buyer Strategy: Example BASF

39. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 39 Decentralized / delegated products Local demand Local hub buyer responsible for procurement Procurement hubs for non-focus products Procurement Hubs (Source: Britt, 2011) 5. Procurement Hubs: Example BASF

40. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 40 Chapter 6 Sourcing Strategies

41. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 41 6. Sourcing Strategies: Tasks of Procurement (Source: Arnold 1997)

42. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 42 6. Sourcing Strategies: Sourcing-Toolbox Supply Strategy as a Combination of Sourcing Concepts (Source: Arnold 1997)

43. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 43 Different origins of specificity (see Williamson 1989) site specificity physical asset specificity human asset specificity dedicated asset specificity brand name specificity time specificity ………………………………………………………………. information specificity (UA) Process specificity (release process including quality management) selected supplier specificity / relationship related specificity Input specificity 6. Sourcing Strategies

44. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 44 Transaction costs consist of Coordinating costs Control costs Opportunity costs ex ante transaction costs ex post transaction costs Transaction costs define different governance modes (between markets, hierarchy and hybrid forms). Specificity and strategic value are the main factors which define the characteristic of a transaction. 6. Sourcing Strategies

45. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 45 How can be achieved completeness of contracts between buyer and supplier? explanation by agency theory Complete means: All possible elements which influence the relationship between benefits and costs are clearly defined and operationalized. Information problems cause A.Ex ante: Hidden characteristics Problem: the well performing suppliers will be ignored ( ≙ adverse selection) B. Ex post: hidden action moral hazard hidden information hidden intention hold up 6. Sourcing Strategies

46. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 46 How to solve information problems? signalling (supplier´s activity) (e.g. open book policy) screening (buyer´s activity) (e.g. auditing) self selection (offering hidden infromation by choosing specific contract modalities) incentive driven contract elements to stimulate convergence of interests 6. Sourcing Strategies

47. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 47 (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

48. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 48 (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

49. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 49 Development of a World Class Supply Base Identify, assess and rationalize the supplier base Objective: Create a pool of potentially capable suppliers. 1 st step: Identify strategic global supply chain needs - end customers requirements - product development targets - improvement of market position and competitiveness in product lines and market areas. All these requirements directed to supplier potentials and abilities are steered by the general sourcing objectives like cost reduction quality / value improvement technology road maps business expansion plans. (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

50. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 50 Development of a World Class Supply Base 2 nd step: Search for competitive suppliers. 3 rd step: Establish controlling system for global sourcing activities: - performance metrics - supplier assessment model - tracking system for supplier performance - reporting of total cost of ownership figures establish immediate feedback to internal customers and suppliers. 4 th step: Supplier base fit Eliminate suppliers which are not able to fulfil companys requirements; identify already fully capable suppliers; identify suppliers which can be developed in the future. (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

51. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 51 Development of a World Class Supply Base Problem solving development Objective: Suppliers meet all current requirements of manufacturing and other business activities. 5 th step: On site visits to assess capabilities and potentials of suppliers by cross-functional teams - technological assessment - suppliers risk assessment - environmental risk assessment. 6 th step: Activities to eliminate suppliers deficiencies - by technical support - by management support - by financial support. (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

52. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 52 Proactive development Objective: Self-reliant global supply base with ability for continuous improvement. 7 th step: Establish open relationship through feedback and information sharing; establish appropriate communication culture for mutual understanding; provide efficient IT-systems. 8 th step: Systematic supplier development - direct involvement of supplier; avoid agency problems - incentives and rewards - warnings and penalties Maintain efforts and activities to reach self-reliance of relationship. Development of a World Class Supply Base (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

53. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 53 Integrative development Objective: Globally aligned supplier network. 9 th step: Supplier integration in new product/process development - share business plan information and technology road maps - integrate staff members, employees of suppliers (and vice versa) 10 th step: Establish performance improvement in second tier suppliers; realize concept of supply chain management upstream. 11 th step: Establish integrated supplier network: - supplier becomes responsible for supplying multiple global company sites - develop benefits by horizontal extension of supplier network. Development of a World Class Supply Base (Source: Krause/Handfield, 2000) 6. Sourcing Strategies

54. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 54 In the Real World, Outsourcing Frequently Fails to Deliver its Promise 6. Calling a Change in the Outsourcing Market

55. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 55 „Do what you can do best – outsource the rest“ „Outside Resource Using“ Strategic Approach: Focusing on core competences („lean“) = resources view Using of already available skills and capabilities on markets = market view Outsourcing – Offshoring – Make or Buy 6. Outsourcing – what is it?

56. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 56  scale: External supplier can bundle, specialize, balance capacities  technology expertise:  scope: Outsourcing-Partner can provide an access to new/other markets Outsourcing Partner can invest in more efficient technologies – faster, more intense 6. Potential Advantages by Outsourcing

57. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 57 AdvantagesDisadvantages Freeing up of cash: investments can be concentrated on core activities Increased dependence on suppliers Optimal usage of knowledge, equipment and experience of third party Continuous follow-up and monitoring of the supplier relationship necessary Increased flexibility: fluctuations in the workload can more easily be absorbed Risks of communication and organizational problems during the transfer of activities to a third party Outsourcing leads to easier and more focused primary processes in the organization Risks of leakage of confidential information Input through an independent party’s point of view which reduces the risks of introvert short- sightedness in the organization Performance incentives and penalties Risk of losing essential strategic knowledge 6. Advantages and Disadvantages of Outsourcing

58. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 58 Fixe Kosten + Gemeinkosten Variable Kosten + Einzelkosten Splitting der Be- darfe (Spot Buys) Bündelung + lang- fristige Partnerschaft Fixed Costs Indirect Costs Variable Costs Direct Costs Internal Charging External Payments Complexity of Market requirements Variable Costs Direct Costs Determinated Requirements Openness of Performance Profiles Splitting of Requirements (Spot Buys) Bundling + long- term Partnership 6. Aims of Outsourcing

59. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 59 Effect - Relationships Outsourcing Competence- basis Future- skills Positive Effects, e.g.:  Lower costs for knowledge  Extension of the competence profile  Deepening of the competence profile  Concentration on core activities  Organizational development (restructuring; reengineering) Negative Effects, e.g.:  Loss of competence  Decrease of performance quality  Loss of know-how- bearer  Increase of total costs for knowledge  Publication of confidential information ? ? ? 6. Possible Results

60. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 60 Impact of a depth of added value change by in- respectively outsourcing (traditional: „make or buy“) on: -Level of the purchasing policy, the supply management and the placing activities -Capital investment; capital commitment - Number of employees; employment, capacity utilization - Processing competence - Quality - Amount and structure of costs; relation to fixed / variable costs („break-even“-Point) - Production management flexibility - Negotiation potential to external service providers - Risk structures Conclusion: Changes intervene regularly in existing structures / processes (business restructuring / reengineering) 6. Possible Results

61. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 61 Example of automobile industry comparative study from WOMACK / JONES / ROOS of MIT (Japan; USA; West-Europe) Japanese automobile-manufacturer are better, because  lower depth of added value  better networking with supplier therefore: - shorter product development cycles - more intensive use of JIT-supply - major market flexibility - major internal flexibility 6. Competitive Comparison

62. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 62 “Outsourcing has progressed from involving only peripheral business activities towards encompassing more critical business activities that contribute to competitive advantage. Many outsourcing failure cases have been a result of the misapplication of the concept by practitioners.” [Mc Ivor, Ronan: The Outsourcing Process; Cambridge 2005] 6. Development Process of Outsourcing

63. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 63 Chapter 7 Vertical and Horizontal Cooperation

64. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 64 7. Supplier relationship as a connecting factor between the supply market and the firm purchasingsupply partner 3. contracting firm demand the firm supply market purchasing

65. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 65 7. Vertical and Horizontal Cooperation Definition of cooperation: constitutional features Independence of the cooperation members is a criteria needed by law to distinguish it from a merger Partners in the cooperation are two or more enterprises The main interest of the cooperation is an ex ante matching of plans or a coordination of single interests, mainly in one functional part (e.g. purchasing) The main goal of a cooperation is a better economic situation for the cooperation partners, reached by a cooperative practice

66. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 66 7. Vertical and Horizontal Cooperation OEM Key Suppliers System/Module Suppliers Supplier Base (components, raw materials etc.) Vertical Global Sourcing Cooperation (Supplier Partnering) Horizontal Global Sourcing Cooperation (Cooperative Purchasing)

67. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 67 7. Vertical and Horizontal Cooperation Vertical Cooperation: supplier/seller-relationship Modern sourcing concepts need cooperations Cooperation reduces transaction costs Horizontal Cooperation: Cooperative Purchasing Planning of horizontal supply cooperations setting goals finding partners: the idea of a procurement fit

68. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 68 7. Fit Dimensions as Factors in Partner Selection Partner Management Funda- mentalFit Strategic Fit Cultural Fit Logistics Fit Commitment Shared vision Power balance Mutual benefits Manageable risk Significant Potential for added value Agreement strategic goals Compatible business plans Agreement on configuration Same planning horizon Pluralism Assimilation Transfer Resistance Object compatibility Transport mode compatibility Information flow compatibility Funda- mentalFit Strategic Fit Cultural Fit Funda- mentalFit Strategic Fit Logistics Fit Cultural Fit Funda- mentalFit Strategic Fit Logistics Fit Funda- mentalFit Strategic Fit Logistics Fit Funda- mentalFit Cultural Fit Strategic Fit Logistics Fit Funda- mentalFit Cultural Fit Strategic Fit Logistics Fit Funda- mentalFit Cultural Fit Strategic Fit Logistics Fit Funda- mental Fit (Source: Arnold,1999)

69. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 69 7. Economic Effect of Vertical Cooperation Vertical cooperations have the goal to reduce the coordination costs through intensive cooperation with selected system suppliers. costs Specialization level Costs of production Coordination costs Paradigm of specialization Paradigm of cooperation

70. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 70 7. Economic Effect of Horizontal Cooperation Purchaser Mechanisms of horizontal purchasing cooperation Economies of Scale Economies of Process Economies of Information Individual Demand A Individual Demand B Individual Demand C Total Demand A+B+C Economy of Scale Supplier (Electronic) Bundle Platform

71. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 71 Chapter 8 Sourcing Processes

72. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 72 8. Enabling Processes for Global Sourcing

73. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 73 Kraljic’s (1983) product portfolio based on two variables: 1.Purchasing’s impact on the bottom line the profit impact of a given supply item measured against criteria such as cost of materials, total cost, volume purchased 2.Supply risk measured against criteria such as short-term and long term availability, number of potential suppliers, structure of supply markets. 8. Purchasing Portfolio Analysis

74. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 74 Leverage products alternative sources of supply available substitution possible Competitive bidding Strategic products critical for product’s cost price dependence on supplier Performance based partnership Routine products large product variety high logistics complexity labor intensive Systems contracting + E-Procurement solutions Bottleneck products monopolistic market large entry barriers Secure supply + search for alternatives Purchasing’s impact on financial results Low High Supply risk 8. Supplier Portfolio

75. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 75 Leverage suppliers many competitors commodity products Buyer dominated segment Strategic suppliers market leaders specific know-how Balance of power may differ among buyer-supplier Routine suppliers large supply many suppliers with dependent position Reduce number of suppliers Bottleneck suppliers technology leaders few, if any, alternative suppliers Supplier Dominated segment Supplier impact on financial results High Low Supply risk Low High 8. Supplier Portfolio

76. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 76 Types of risks endogenous internal exogenous external general riskssituational riskstask-specific risksgeneral risks indirect way influence of competitors direct way influence of customers company size performance programme management of material flow production technology information technology physical sector socio- cultural sector economic sector technolo- gical sector political sector (Source: Beschaffung Aktuell, 02/2011) 8. Risk Management

77. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 77 risk identification 1 risk analysis; assessment 2 risk management 34 communication risk awareness risk perception early warning system risk screening 8. Risk Management: A Process Perspective

78. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 78 global risk management market risk environ- mental risk price risk… transport risk compliance risk 8. Risk Management: An International Perspective

79. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 79 Non-Economical RisksEconomical Risks Political risks Social Conflicts Confiscation of goods Political trade protection e.g. tariffs Administrative risks Bureaucracy Ineficiency of local administration Cultural risks Language Way of life Jurisdictional risks enforceability of contracts Makro-Economical Economic cycles Changes in currency exchange rates Mikro-Economical Transport and distribution risks Contractual risks (Claim Management) 8. Risk Analysis in Global Sourcing

80. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 80 Systematisation of currency exchange risks Estimation risk) (economic risk) (transaction risk) Exchange rate change time (Source: Büschgen, H.E. (1997), International Finance, S. 311) 8. Risk Analysis in Global Sourcing

81. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 81 - A hedge is a position established in one market in an attempt to offset exposure to price changes or fluctuations in some opposite position with the goal of minimizing one's exposure to unwanted risk. Example: Hedging an agricultural commodity price A typical hedger might be a commercial farmer. The market values of wheat and other crops fluctuate constantly as supply and demand for them vary, with occasional large moves in either direction. Based on current prices and forecast levels at harvest time, the farmer might decide that planting wheat is a good idea one season, but the forecast prices are only that — forecasts. Once the farmer plants wheat, he is committed to it for an entire growing season. If the actual price of wheat rises greatly between planting and harvest, the farmer stands to make a lot of unexpected money, but if the actual price drops by harvest time, he could be ruined. If the farmer sells a number of wheat futures contracts equivalent to his crop size at planting time, he effectively locks in the price of wheat at that time: the contract is an agreement to deliver a certain number of bushels of wheat to a specified place on a certain date in the future for a certain fixed price. The farmer has hedged his exposure to wheat prices; he no longer cares whether the current price rises or falls, because he is guaranteed a price by the contract. He no longer needs to worry about being ruined by a low wheat price at harvest time, but he also gives up the chance at making extra money from a high wheat price at harvest times. (Source: Dichtl, E.; Issing, O. (Hrsg.): Vahlens Großes Wirtschaftslexikon. 2. Aufl., München 1994, S. 906-907 und Alisch, K.; Winter, E.; Arentzen, U. (Hrsg.): Gabler-Wirtschafts-Lexikon. 16. Aufl., Wiesbaden: 2004, S. 1381) Hedging 8. Risk Analysis in Global Sourcing

82. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 82 (Source: Britt, 2011) 8. Risk Management: Example BASF

83. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 83 Chapter 9 Controlling of Procurement

84. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 84 9. Controlling of Procurement What should be measured? no single index of performance no universal way of evaluating commercial focus (price, quantity, place, service, time, cost savings) efficiency metrics (process costs, TCO-concept) effectiveness parameters (improve capabilities) Who should be interested? procurement management internal customers top management

85. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 85 Purchasing Materials costs/ prices Product / quality Purchasing logistics Purchasing organization Purchasing Effectiveness Purchasing Efficiency PurchasingPerformance Materials price/cost control Materials price/cost reduction Involvement of purchasing in new Product development Purchasing and Total Quality control Adequate requisitioning Order and inventory policy Supplier delivery reliability Personnel Management Procedures and policies Information system Key areas of procurement performance measurement 9. Controlling of Procurement

86. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 86 DimensionMeasurement aimed atC/I*Examples Purchased materials prices and costs Purchased materials cost control Purchased materials cost reduction CCCC Materials budgets, variance reports, price inflation, reports, purchasing turnover Purchasing cost saving and avoidances, impact on return and investment Product / quality of purchased materials Early purchasing involvement in design and development Incoming inspection quality control and assurance ICIC Time spent by purchasing on design and engineering projects, sampling reject rate (%) Reject rate (%), line reject rate (%), quality costs per supplier Purchasing logistics and supply Monitoring requisitioning Delivery reliability (quality and quantity) I/CPurchasing administration lead times, order backlog (per buyer), rush orders, delivery reliability index per supplier, materials shortages, inventory turnover ratio, JIT deliveries Purchasing staff and organization Training and motivation of purchasing staff Purchasing management quality Purchasing systems and procedures Purchasing research ITime and workload analysis of purchasing department, purchasing budget, purchasing and supply audit * Note: C = continuous and I = Incidental Examples of purchasing performance indicators 9. Controlling of Procurement

87. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 87 9. Benchmarking Benchmarking in procurement = kind of comparison between firms to improve purchasing performance Types business funtion oriented (e.g. outsourcing of non-core-activities) supply process oriented (best practices in purchasing processes) externally oriented (outside own business – outside own industry) Model for supply process benchmarking 1.Identification of status quo 2.Cost information and evaluation 3.Illustration of own deficits 4.Checking of transfer possibilities 5.Infrastructure investments 6.Implementation of best practices 7.Continuous improvement

88. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 88 Benchmarking object Product benchmarking Instrument depend heavily on product structure, technology and complexity Strategy benchmarking Strategies are often incomparable because they are highly specific for one company Organization benchmarking Focuses on structures, not on processes Process benchmarking Allows to gain knowledge on ways to handle business activities without the risk, that results are not transferable Benchmarking subject Company benchmarking Not easy to handle, because it allows no focus Business function benchmarking Concentrates on one business function, in our case on purchasing Benchmarking partner Internal benchmarking Only possible for multibusiness unit organizations External benchmarking (same branch) Often not easy because the partners are competitors External benchmarking (different branches) Ideal to identify the real best practice benchmark 9. Types of Benchmarking

89. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 89 Cross-Industry Standard Benchmarks November 2010UtilitiesChemical 1.Total spend as a percent of sales dollars…………………………………………….......... 2.Procurement operating expense as a percent of sales dollars…………….…………….. 3.Procurement operating expense as a percent of total spend…..………………………… 4.Procurement operating expense per procurement employee………………...………….. 5.Procurement employees as a percent of company employees…………….……………. 6.Total spend per procurement employee….………………………………………………… 7.Managed spend per procurement employee………………………………………………. 8.Percent of total spend managed/controlled by procurement……………………………... 9.Percent of total spend offshore…………….………………………………………………... 10.Percent of total spend onshore………………….…………………………………………... 11.Average annual spend on training per procurement employee….………………………. 12.Cost avoidance savings as a percent of total spend…………..………………………….. 13.Cost reduction savings as a percent of total spend…………..…………………………… 14.Percent of active suppliers accounting for 80% of total spend……….………………….. 15.Percent of total spend with diversity suppliers……….…………………………………….. 16.Percent of active suppliers who are eProcurement enabled……………………………... 17.Percent of total spend via eProcurement………….……………………………………….. 18.Percent of total spend via eAuctions………….…………………………………………….. 19.Percent of total spend via procurement cards………………….………………………….. 20.Percent of total spend via strategic alliances…………….………………………………… 34,36% 0,12% 0,64% 99.309$ 1,14% 20,75$ (m) 16,71$ (m) 85,48% 0,36% 99,64% 794$ 1,13% 1,22% 4,53% 12,13% 5,62% 0,57% 2,14% 19,81% 51,30% 0,22% 0,39% 111.031$ 0,92% 33,43$ (m) 31,41$ (m) 92,29% 15,03% 84,97% 693$ 1,12% 1,50% 4,74% 24,42% 11,26% 9. Report of Cross-Industry Standard Benchmarks (CAPS)

90. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 90 9. Example: Balanced Scorecard

91. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 91 „Not everything that can be counted counts, and not everything that counts can be counted.“ „if you can’t measure it you can’t manage it.“ [Albert Einstein (1879 - 1955), German theoretical physicist] 9. Controlling of Procurement

92. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 92 Chapter 10 Logistics as an Enabler

93. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 93 10. Case study: production network Behr Brazil São Paulo USA Dayton Canton Charleston Fort Worth Webberville South Africa DurbanPretoria JohannesburgPort Elizabeth Spain Barcelona Montblanc India Pune France Hambach Rouffach Czech Republic Mnichovo Hradiste Germany MühlackerKirchberg Vaihingen/EnzMylau PforzheimLippstadt Neustadt/DonauReichenbach StuttgartMeerane Intensive cooperation on capacity, production technology and logistics

94. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 94 logistics market: TUL-logistics: goods traffic, handling, picking and storage activities of the entire economy Coordinating-logistics: order processing, disposition, supply chain-planning costs (+ holding inventory costs) Not included: industrial production processes, which are usually associated with functions and cost responsibilities of the production; activities in the branches of retail trade, carried out by the sales staff Contract-logistics: businesses, integrating tight relationships between carriers and service providers; several logistics functions, long term relationships and a high volume of sales will be handled Market data Germany:  Market volume: 200 Billion Euro  Workplaces in the logistics industry: 2,65 Mill.  Inhouse logistics: 51 %  Market volume service provider: 98,5 Billion Euro  Logistics cost components: 8,3 % of gross domestic products Trends:  small market growth due to rationalization effects  Increase in market share of service provider  Growth potential for contract logistics  Quantities of goods largely constant/ transport distances increase (Source: Klaus/Hartmann/Kille 2010/2011) 10. The logistics market - study "Top 100 Logistics"

95. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 95 (Source: Klaus/Hartmann/Kille 2010/2011, p.164) 10. Logistics Market Volume in Europe

96. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 96 - - 1.Internal coordination of physical commodity flows (Adjustment of container systems, technical additives, avoiding of „breackages“ in commodity flow 2.Cross-plant coordination with suppliers and customers (Standardization of packages, process flows, means of transport) 3.Coordination of short-term production tasks and commodity flows (optimal production lots and optimal order size) 4.Coordination on product and programme policy level (management of modularization complexity, flexible manufacturing systems) 5.Coordination in structure decisions (logistics requiremented constructions of products, recyclable design) 6.Coordination on strategic corporate planning level (coordination with competitive strategy, divisional strategies) 10. Coordination in Logistics

97. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 97 - Logistics is responsible for regional and temporal change of goods - Information flow and product flow belong together and represent the main elements of logistic systems - Efficient and effective arrangements of logistic systems - Focusing on the requirements of customers 10. Definitions of Logistics

98. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 98 System of l ogistics costs (Source: Pfohl 2004, p. 31) 10. Economic Targets of Logistics

99. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 99 Reduction of delivery time Improvement of delivery reliability Improvement of delivery condition Increase of delivery flexibility etc. Reduction of carrying costs Reduction of storage costs Reduction of transportation costs Reduction of order processing costs etc. Logistics Success Logistics Performance Logistics Costs overall optimization 10. Logistics Success: Costs Reduction vs. Performance Improvements

100. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 100 Chapter 11 Supply Chain Management

101. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 101 11. The Concept of Supply Chain Management

102. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 102 11. The Concept of Supply Chain Management Cooper/Lambert/Pagh (1997): “The integration of all key business processes across the supply chain is what we are calling supply chain management.”

103. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 103 11. Supply Chain Operations Reference-Model

104. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 104 11. Supply Chain Planning Tools ERP Systems Strategic Planning Level Tactical Planning Level Operational Level HR Mana- gement Financial Mana- gement Life- Cycle Mana- gement Procure- ment Pro- duction Distribu- tion Customer Service Final Customer Strategic (Supply Chain) Management Supply Chain Planning Tools Market Analyses International Logistics Supplier Manage- ment Product Develop- ment Customer Management Product Data Management Production Control Cross Docking VMI Finan- cial Control Finan- cial Analysis Asset Management

105. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 105 11. Challenges for Supply Chain Management

106. Prof. Dr. Dr. h.c. Ulli Arnold, Chair for Industrial Goods Marketing and ProcurementSlide 106 11. Crossroads in Supply Chain Management