Global Sourcing and
Procurement
Chapter Sixteen
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
6-2
Learning Objectives
LO16–1: Explain what strategic sourcing
is.
LO16–2: Explain why companies
outsource processes.
LO16–3: Analyze the total cost of
ownership.
LO16–4: Evaluate sourcing performance.
6-3
Strategic Sourcing
Strategic sourcing: the development and
management of supplier relationships to acquire
goods and services in a way that aids in achieving
the immediate needs of the business
In the past, sourcing was another name for
purchasing.
As a result of globalization, sourcing implies a more
complex process suitable for products that are
strategically important.
6-4
Strategic Sourcing (continued)
Specificity: refers to how common the item is and, in a
relative sense, how many substitutes might be available
– Commonly available products can be purchased using a relatively
simple process.
Request for proposal (RFP): used for purchasing items that
are more complex or expensive and where there may be a
number of potential vendors
Vendor-managed inventory: when a customer actually
allows the supplier to manage an item or group of items
for them
6-5
Sourcing/Purchasing Design Matrix
Exhibit 16.1
Sourcing/Purchasing Design Matrix
6-6
The Bullwhip Effect
Bullwhip effect: phenomenon of variability
magnification as we move from the customer
to the producer in the supply chain
– A slight change in consumer sales ripples
backward as magnified oscillations upstream, like
the result of a flick of a bullwhip handle.
Continuous replenishment: inventory is
replaced frequently, as part of an ongoing
process
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The Bullwhip Effect
Consumer sales
are predictable
and steady.
Retailer orders start to show
variability as lot sizes and other
factors have an impact.
Farther up the supply chain
variability increases.
6-8
Functional Products
Functional products include the staples that people buy in
a wide range of retail outlets, such as grocery stores and
gas stations.
Product life
Contribution
cycle of more margin of 5 to
than two years
20 percent
Only 10 to 20
product
variations
Lead time for
An average make-to-order
products of
forecast error
from six
of only 10
months to one
percent
year
6-9
Innovative Products
Innovation can enable a
company to achieve higher
profit margins.
Typically these products have
a life cycle of just a few
months.
• Imitators quickly erode the
competitive advantage that innovative
products enjoy.
• Companies are forced to introduce a
steady stream of newer innovations.
Newness of the innovative
products makes demand for
them unpredictable.
The short life cycles and the
great variety typical of these
products further increase
unpredictability.
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Uncertainty Framework
Exhibit 16.3
Supply Chain Uncertainty Framework
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Supply Chain Strategies
Efficient supply chains utilize
strategies aimed at creating
the highest cost efficiency.
Risk-hedging supply chains:
utilize strategies aimed at
pooling and sharing resources
in a supply chain to share risk.
Strategy
Responsive supply chains
utilize strategies aimed at
being responsive and flexible.
Agile supply chains utilize
strategies aimed at being
responsive and flexible to
customer needs.
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Outsourcing
Outsourcing: moving some of a firm’s
internal activities and decision
responsibility to outside providers
Allows a company to create a competitive
advantage while reducing cost.
An entire function may be outsourced, or
some elements of an activity may be
outsourced, with the rest kept in-house.
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Reasons to Outsource
Exhibit 16.4
Reasons to Outsource and the Resulting Benefits
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Structuring Supplier Relationships
Exhibit 16.5
A Framework for Structuring Supplier Relationships
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Green Sourcing
Being environmentally responsible has become a
business imperative.
Many firms are looking to their supply chains to
deliver “green” results.
Financial results can often be improved through
going green.
A comprehensive green sourcing effort should
assess how a company uses items that are
purchased internally.
It is also important to reduce waste.
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Green Sourcing Process
Exhibit 16.6
Six-Step Process for Green Sourcing
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Total Cost of Ownership
Exhibit 16.7
Total cost of ownership (TCO):
an estimate of the cost of an
item that includes all the costs
related to the procurement and
use of an item, including any
related costs in disposing of the
item
Can be applied to internal costs
or more broadly to costs
throughout the supply chain
Total Cost of Ownership
Example 16.1
Sourcing Performance Measures
Total average inventory value: Value of raw material,
WIP, and finished goods inventory
– Meaning depends on size of firm, value of materials, etc.
– Must consider scale in interpreting
Inventory turnover/turns: Ratio of annual COGS to
total average inventory value.
– How often average inventory is moved through the system in
a year
» Inventory Turnover =
Cost of Goods Sold (Annual)
Average Inventory Level
– Higher is better from efficiency standpoint
– Allows comparisons between operations of different scale
Sourcing Performance Measures
Weeks of supply: Inverse of inventory turns, scaled to
weeks
– How many weeks worth of inventory are in the system at any
point in time?
– Lower is better from an efficiency standpoint
Average Inventory Level
– Weeks of Supply =
𝑥 52 weeks ∗
Cost of Goods Sold (Annual)
Days of Supply: Same concept, scaled to days
Average Inventory Level
– Days of Supply =
𝑥 365 days ∗
Cost of Goods Sold (Annual)
* Or as many weeks/days the company operates in a year. (Company choice how
to compute. Like productivity figures, be consistent in doing so.)
Example Metric Calculations
Firm has an annual COGS of $15.5 million, with average
total inventory value of $1.4 million. The firm operates
250 days/year.
$15,500,000
Inventory Turnover =
= 11.07
$1,400,000
250
Weeks of Operation =
= 35.7 weeks
7
Weeks of Supply =
$1,400,000
𝑥 35.7 weeks = 3.22 weeks*
$15,500,000
$1,400,000
Days of Supply =
𝑥 250 days = 22.58 days*
$15,500,000
*Using operational weeks/days
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Example 16.2
Days of Supply =
$459
𝑥 365 days = 4.14 days
$40,190
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