Benefits of Global Operations
Tangible
Intangible
Reduce Direct and Indirect Costs
Reduce Capital Cost
Reduce Taxes
Reduce Logistics Costs
Overcome Tariff Barriers
Provide Better Customer Service
Spread Foreign Exchange Risk
Build Alternative Supply Sources
Preempt Potential Competitors
Learn from:
Local Suppliers/Customers/
Competitors/Foreign Research
Centers
Attract Talent Globally
Offshoring Opportunities
Source: Offshoring and Beyond, McKinsey Quarterly, 2003
1
2
Upgrading the Strategic Role
Changing Conditions
z Focus on intangible benefits
z Need to treat foreign facilities or activity centers
as sources of competitive advantage
{Trade pacts, reduction of tariffs
zLower need to set up foreign factories to
overcome trade barriers
{Increased manufacturing/service sophistication
zLess emphasis on low wages
{Pressure to create faster transfer of ideas from
development to delivery
zNeed for closer inter-functional relationships
{e.g. learning from local suppliers, gaining
experience
z Cultivate competencies
{Improve the inside
{Develop external resources
{Take a global mandate
z Create a robust network
{Can absorb impacts of changes in the
environment
3
Paths to Higher Strategic Roles
z Plan for long-term commitment
4
Types of Product or Service Factories
5
z Offshore product or service factory
{Minimum setup investments, low-cost production
z Source product or service factory
{Broader strategic role, greater local control
z Server product or service factory
{Set up to offset costs (taxes, duties) and risk
(FOREX)
z Contributor product or service factory
{Separate functions (R&D), more responsibilities
z Outpost product or service factory
{Primary role: information collection
z Lead product or service factory
{Creates new processes, products, and
technologies
6
1
Five Themes
z Historical and Current Frameworks of
Sourcing
z Global Outsourcing
z Supplier Relationships
z Supplier Development
z Advances in Sourcing – Practices and
Tools
Sourcing Strategy
8
PORTER’S MODEL
Support Activities
Firm Infrastructure
(general management, accounting, finance, strategic planning)
Historical and Current
Frameworks in Sourcing
Human Resources Management
(recruiting, training, development)
Technology Development
(R & D, product and process improvement)
Procurement
(purchasing of raw materials, machines, supplies)
Profit
Margin
Primary Activities
Theme 1
Inbound
Logistics
Operations
Outbound
Logistics
(raw
materials
handling
and
warehousing)
(machining,
assembling,
testing
(warehousing
and
distribution
of finished
product)
Marketing
and Sales
Service
(advertising,
promotion,
pricing,
channel
relations)
(installation
repair,
parts)
10
Source: Porter (1980)
Internal Integration
Disintegrated Supply Chain
Information, Product, Service and Financial Flows
M
A
T
E
R
I
A
L
S
INTERNAL ENTERPRISE
The Great Divide
Procurement
and
Manufacturing
Integration
Distribution
and
Marketing
Integration
Information, Product, Service and Financial Flows
E
N
D
M
A
T
E
R
I
A
L
S
C
U
S
T
O
M
E
R
S
Source: Global Benchmarking and Supply Chain Project - MSU
11
INTERNAL
ENTERPRISE
Sourcing
Logistics
Operations
E
N
D
C
U
S
T
O
M
E
R
S
Source: Global Benchmarking and Supply Chain Project - MSU
12
2
Stages of Global Sourcing Evolution*
Enterprise Extension
I - Basic
Beginnings
Relationship Management
II - Moderate
Development
Information, Product, Service, Financial and Knowledge Flows
M
A
T
E
R
I
A
L
S
SUPPLIER
NETW ORK
INTEGRATED
ENTERPRISE
Sourcing
DISTRIBUTIVE
NETW ORK
Logistics
Operations
E
N
D
„ Quality/cost
teams
„ Longer -term
contracts
„ Volume
leveraging
„ Supply base
consolidation
C
U
S
T
O
M
E
R
S
„ Ad hoc supplier
alliances
„ Crossfunctional
sourcing teams
„ International
sourcing
„ Cross-location
sourcing teams
Capacity, Information, Core Competencies, Capital and Human Resources
Source: Global Benchmarking and Supply Chain Project - MSU
III - Limited
Integration
IV- Fully Integrated
Supply Chains
„ Global sourcing
„ Strategic supplier
alliances
„ Supplier
development
„ Total cost of
ownership
„ Parts/service
standardization
„ Early supplier
involvement
„ Global supply
chains with
external customer
focus
„ Cross-enterprise
decision making
„ Full service
suppliers
„ Early sourcing
„ Insourcing/
outsourcing to
maximize core
competencies of
firms throughout
the supply chain
* Adapted from Monczka et al (2000)
14
Factors affecting Global Outsourcing
Decisions
Global Outsourcing Principles
z Comparative Advantage- low price contracts;
z Hassles in manufacturing – If can not be made
in-house outsource
z Decisions are made about individual parts
rather than product families
Theme 2
16
Reasons for wrong outsourcing
decisions
Result of wrong outsourcing strategy
z Lost Focus- Companies are trying to catch up
with small manufacturers in cost and quality;
z Companies are manufacturing commodity
products to achieve economies of scale; and
z Erosion in capability or core competency of the
company.
17
z Lack of coordination between different functions,
inconsistent priorities and lack of accountability;
z Manufacturers fear long contracts/relationship
would increase the bargaining power of suppliers;
z Managers lack of focus. They suffer from “Do it all
here ”attitude;
z Companies had no analytical tool to
distinguishing core parts from commodities; and
z Capacity & Labor issues- Capacity utilization and
labor efficiency.
18
3
Outsourcing Model
Supplier Relationships
Based on the following three main principles:
z Focus on critical components and core
competency;
z Outsource components where suppliers have
distinct competitive advantage; and
z Use outsourcing to generate employee
commitment and improve productivity.
Theme 3
19
Kieretsu
Evolution of Kieretsu
z A complex network of Japanese firms which pursues
z Article compares the different approaches
sourcing (goods, services & finances) from within the
network
to Kieretsu by Matsushita, Hitachi and
z Characteristics of a typical kieretsu
Toyota
{ Several large firms like a major bank, trading company,
z Additional article – HBR article on
chemical firm, steel unit, automobile industry etc
{ Cross-holding, favoritism, long-term relationship &
Chrysler’s experience with Kieretsu
interlocking directorates
21
22
Interesting updates
Supplier Development
z The collapse of the powerful Mitsubishi
Kieretsu
Theme 4
z Nissan comes out of heavy losses and
survival uncertainty when Carlos Ghosn
takes charge and breaks the Kieretsu
model
23
4
Steps to Effective Supplier Development
Pitfalls
z Identify critical commodities
z Identify critical suppliers
z Form a cross-functional team (internally)
z Meet with suppliers’ top management
z Identify key projects
z Define details of projects
z Monitor status and modify strategies
z Based on 200 companies with 83 actually
responding in a variety of industries.
z Pitfalls generally occur in the last 3 or 4
steps.
z Three types of pitfalls
{Supplier-specific
{Buyer-specific
{Buyer-supplier interface
25
26
Key Sourcing Processes and Associative
Tools
Advances in Sourcing :
Practices and Tools
Supplier
Scoring
And Assessment
Theme 5
Supplier
Selection
And
Contract
Negotiation
Supplier Scorecards
Total Cost of Ownership
Design
Collaboration
Procurement
Sourcing
Planning
And
Analysis
Target Costing E-catalogs
Spend Analysis
Value Analysis/ Online market places Supplier Relationship
Value Engg. Reverse auctions
Management (SRM)
28
The Role of Sourcing
in a Supply Chain
Sourcing Processes
z Sourcing is the set of business processes
required to purchase goods and services
z Sourcing processes include:
{Supplier scoring and assessment
{Supplier selection and contract
negotiation
{Design collaboration
{Procurement
{Sourcing planning and analysis
z Supplier Scoring and Assessment
z Supplier Selection and Contracts
z Design Collaboration
z The Procurement Process
z Sourcing Planning and Analysis
29
30
5
Benefits of Effective
Sourcing Decisions
Supplier Scoring and Assessment
z Better economies of scale can be achieved if
orders are aggregated
z More efficient procurement transactions can
significantly reduce the overall cost of purchasing
z Design collaboration can result in products that
are easier to manufacture and distribute,
resulting in lower overall costs
z Good procurement processes can facilitate
coordination with suppliers
z Appropriate supplier contracts can allow for the
sharing of risk
z Firms can achieve a lower purchase price by
increasing competition through the use of
auctions
z Supplier performance should be compared
on the basis of the supplier’s impact on
total cost
z There are several other factors besides
purchase price that influence total cost
31
Supplier Assessment Factors
z Replenishment Lead
Time
z On-Time
Performance
z Supply Flexibility
z Delivery Frequency /
Minimum Lot Size
z Supply Quality
z Inbound
Transportation Cost
z Pricing Terms
z Information
Coordination
Capability
z Design
Collaboration
Capability
z Exchange Rates,
Taxes, Duties
z Supplier Viability
32
Supplier Scoring and Assessment
z Supplier Scorecard – Metalcraft
{ Used in the sourcing module of IBUS 736
{ Several local companies use this tool
z Bose
z Sonoco
z Total Cost of Ownership – USC project –
Class of 2003
33
Supplier Selection
34
Supply Chain Contracts
z Single vs. Multiple sourcing
{Single sourcing facilitates asset sharing, relationship
building and commitment
z Downside is highly risky
z Contracts to increase product availability
{Incentives to stock
z Contracts to coordinate supply chain costs
{Multiple sourcing promotes competition
{Forecasting/Planning (CPFR)
z Downside is promotes opportunism among suppliers
z Contracts to induce performance improvement
{Example : Lopez era in GM
{Asset Specificity, Shared savings, Liberal credit terms
z Scorecards
Comment: Government agencies tend to be experts in
contract definition and stipulation; (Example: USC
sourcing projects)
{Raises the objectivity level of assessment
{Promotes benchmarking
{Dynamic/Real time assessment
{Communication tool
35
36
6
The Procurement Process
Design Collaboration
z 50-70 percent of spending at a manufacturer is
through procurement
z 80 percent of the cost of a purchased part is
fixed in the design phase
z Design collaboration with suppliers can result in
reduced cost, improved quality, and decreased
time to market
z Important to employ design for logistics, design
for manufacturability
z Manufacturers must become effective design
coordinators throughout the supply chain
z The process in which the supplier sends product
in response to orders placed by the buyer
z Goal is to enable orders to be placed and
delivered on schedule at the lowest possible
overall cost
z Two main categories of purchased goods:
{Direct materials: components used to make finished
goods
{Indirect materials: goods used to support the
operations of a firm
{Differences between direct and indirect materials
37
Classification of Purchased Items
Use
Accounting
Direct Materials Indirect
Materials
Production
Maintenance,
repair, and
support
operations
Cost of Goods
SG&A
Sold
Any delay will
Less direct
delay production impact
Low
High
Impact on
Production
Processing Cost
Relative to Value
of Transaction
Number of
Low
Transactions
38
The Procurement Process
See
Recent
Study on
Indirect
Spend by
CAPS
High
z Focus for direct materials should be on
improving coordination and visibility with
supplier
z Focus for indirect materials should be on
decreasing the transaction cost for each
order
z Procurement for both should consolidate
orders where possible to take advantage of
economies of scale and quantity discounts
39
Sourcing Planning and Analysis
Product Categorization by Value and Criticality
z A firm should periodically analyze its procurement
spending and supplier performance and use this
analysis as an input for future sourcing decisions
z Procurement spending should be analyzed by part and
supplier to ensure appropriate economies of scale
z Supplier performance analysis should be used to build
a portfolio of suppliers with complementary strengths
{Cheaper but lower performing suppliers should be
used to supply base demand
{Higher performing but more expensive suppliers should
be used to buffer against variation in demand and
supply from the other source
Criticality
High
Critical Items
Strategic Items
General Items
Bulk Purchase
Items
Low
Low
Value/Cost
40
High
41
42
7
Making Sourcing
Decisions in Practice
Sourcing Planning and Analysis
z Aggregate the spending
z Build a supplier portfolio
z Allocate demand to suppliers
z Use multifunction teams
z Ensure appropriate coordination across
regions and business units
z Always evaluate the total cost of
ownership
z Build long-term relationships with key
suppliers
z Enabling tool: Supplier Relationship
Management (SRM) module
z Example: Boeing’s use of SRM for parts
commonality consolidation and sourcing
43
44
8