CHAPTER 4
STRATEGIC SOURCING FOR
SUCCESFUL SUPPLY CHAIN
MANAGEMENT
Principles of Supply Chain Management:
A Balanced Approach
Prepared by Daniel A. Glaser-Segura, PhD
Learning Objectives
You should be able to:
• Describe the difference between
purchasing and strategic sourcing
• Describe how strategic sourcing plans
are developed and implemented.
• Define and describe the terms green
sourcing, VMI, JIT II, insourcing, cosourcing, and co-managed inventories.
• Describe sourcing’s role in managing
key supplier relationships.
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Learning Objectives (Cont.)
• Describe the performance criteria used in
assessing suppliers.
• Describe how strategic supplier
relationships can impact the firm.
• Describe how a reverse auction works.
• Understand the importance of sharing the
benefits of strategic partnerships.
• Understand the strategic role played by
the purchasing function in developing &
improving the supply chain.
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Chapter Four Outline
• Developing Successful Sourcing
Strategies
• Supply Base Rationalization
Programs
• Evaluating & Selecting Key Suppliers
• Strategic Alliance & Supplier
Certification Programs
• Green Sourcing
• Outsourcing Products & Services
• Early Supplier Involvement
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Chapter Four Outline (Cont.)
• Strategic Alliance Development
• Managing & Developing Second-Tier
Supplier Relationships
• Use of e-Procurement Systems
• Rewarding Supplier Performance
• Benchmarking Successful Sourcing
Practices
• Using Third-Party Supply Chain
Management Services
• Assessing & Improving the Firm’s
Sourcing Function
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Introduction
Sourcing - all of firm’s activities used to manage
external resources.
Strategic sourcing - managing the firm’s
external resources to support firm’s long term
goals.
Drivers of Strategic Sourcing
–
–
–
–
–
–
Reduce costs & delivery cycle times
Improve quality & long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce high costs of globalization & materials,
Deliver more innovative products more frequently
& cheaply than competitors
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Developing Successful
Sourcing Strategies
Successful Sourcing Strategies are
different for functional products & for
innovative products.
Functional Products - MRO items & other
commonly low profit margins with relatively
stable demands & high levels of
competition.
Innovative Products - characterized by
short product life cycles, volatile demand,
high profit margins, & relatively less
competition.
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Developing Successful
Sourcing Strategies (Cont.)
Framework for supply chain strategy
development (Fig. 4.1):
Step 1 - The firm’s suppliers are classified as
belonging either to the innovative or functional
category.
Step 2 - The goals & strategies of the inbound
portion of the supply chain are developed.
Step 3 - Supply chain capabilities are evaluated
& compared to required performance.
Step 4 - Set goals for improving capabilities.
Step 5 - Implement work plan.
Step 6 - Monitor progress & adjust the work
plans.
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Developing Successful
Sourcing Strategies (Cont.)
Supply Chain Strategy Framework (Fig. 4.1)
Step 1: Classify
purchased
items & their
suppliers
Step 2: Define
supply chain
goals for each
item
Step 3: Identify
capabilities &
improvement
opportunities
Step 4: Develop
work plans
linked to goals
Step 5: Execute
plans to achieve
results
Step 6: Monitor
progress &
make
adjustments
Sourcing strategies of 30 years ago do not work well
today--“squeezing” suppliers to generate a lower annual
purchasing spend hurts strategic relationships!
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Supply Base Rationalization
Programs
Supply base rationalization (AKA
supply base reduction or supply base
optimization) is often the initial supply
chain management effort.
Buyer-supplier partnerships are easier
with a rationalized supply base & result in:
– Reduced purchase prices
– Fewer supplier management problems
– Closer & more frequent interaction between
buyer & supplier
– Greater levels of quality & delivery reliability.
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Evaluating & Selecting Key
Suppliers
When evaluating suppliers to be used in a
collaborative relationship, purchase cost
becomes relatively less important,
particularly with key suppliers.
Key Supplier Selection is conducted by a
cross functional team selection approach
using evaluation forms or scorecards.
Channel partnerships provide value for all
participants, and this is termed channel
equity.
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Strategic Alliance & Supplier
Certification Programs
Supplier certification programs are used
to identify strategic supplier alliance
candidates.
Firms use in-house formal certification
programs, & most require ISO 9000 or
similar certifications as part of the
certification process.
Buyers can monitor quality assurance
methods & identify the type of acceptance
sampling & statistical process control
methods used.
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GREEN SOURCING
Sustainability - Meeting current needs
without hindering future needs in terms of
economic, environmental & social
challenges
The Institute for Supply Management
defines green sourcing as – “Making
environmentally conscious decisions
throughout the purchasing process,
beginning with product and process design,
and through product disposal”
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GREEN SOURCING (Table 4.1)
Steps
Explanation
1.Establish
corporate green
policies
Legitimizes new procedures, top mgmt
support, sets vision & direction, reduces
confusion.
2. Start with a focus
on a limited # of
items
Get comfortable with the process before
expanding and going corporate-wide.
3. Educate the users Provide training for employees. Use
information from outside sources.
4. Develop metric
system
Track even the smallest actions to build
pride in being green. Revisit measures
periodically.
5. Use certified
green products &
services
Ask questions. Get copies of suppliers’
green policies. Require certifications
(e.g.,ISO).
6. Expand towards
sustainability
Use the purchasing department’s internal
and external influence to grow awareness.
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Outsourcing Programs
Outsourcing allows a firm to:
–
–
–
–
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Concentrate on core capabilities
Reduce staffing levels
Accelerate reengineering efforts
Reduce management problems
Improve manufacturing flexibility.
Risks associated with outsourcing,
include:
– Loss of control
– Increased reliance on suppliers
– Increased need for supplier management
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Outsourcing Programs
(Cont.)
Insourcing (backsourcing) - reverting to
in-house production when quality, delivery,
and services do not meet expectations
Co-sourcing (selective sourcing) - the
sharing of a process or function between
internal staff and an external provider &
provides flexibility to decide what areas to
outsource, when, and for how long.
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Early Supplier Involvement
Early supplier involvement (ESI) highly
effective supply chain integrative
techniques.
- Key suppliers become more involved in
the internal operations of the firm,
particularly with respect to new product &
process design, concurrent
engineering & design for
manufacturability techniques.
Value engineering activities help the
firm to reduce cost, improve quality &
reduce new product development time.
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Vendor Managed Inventories
and JIT II
Vendor managed inventory (VMI)suppliers manage buyer inventories to reduce
inventory carrying costs & avoid stockouts for
buyer.
From the buyer-firm’s perspective:
– Supplier tracks inventories
– Determines delivery schedules and order
quantities
– Buyer can take ownership at stocking location.
From the supplier’s perspective:
– Avoids ill-advised customer orders
– Supplier decides inventory set up & shipments
– Opportunity for supplier to educate customers
about other products.
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Vendor Managed Inventories
and JIT II (Cont.)
Co-managed inventories
– Suppliers work from customers’ storage areas or
at the point of assembly or sale
– Bar codes and scanners update computer counts
Electronic data interchange (EDI)
– allows a supplier to profile demand & determine
accurate forecasts
– EDI also provides reorder point data to permit
timely deliveries
Supplier co-location or JIT II
-- Supplier’s employee is embedded in buyer’s
purchasing department to forecast demand,
monitor inventory & place orders with access to
sensitive files & records
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STRATEGIC ALLIANCE
DEVELOPMENT
Alliance development, an extension of
supplier development refers to increasing a
key or strategic supplier’s capabilities.
Supplier alliances result in better market
penetration access to new technologies &
knowledge, & higher return on investment
Alliance development eventually extends to a
firm’s second-tier suppliers, as the firm’s key
suppliers begin to form their own alliances.
See Table 4.2 for developing a strategic alliance
program.
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Negotiating Win-Win Strategic
Alliance Agreements
Collaborative negotiations (aka
integrative negotiations)- both sides
work together to maximize the outcome or
create a win-win result.
-- Requires open discussions and a freeflow of information between parties
Distributive negotiations - refers to a
process that leads to self-interested, one-sided
outcome
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Negotiating Win-Win Strategic
Alliance Agreements (Table 4.3)
Steps
Description
1. Build
preparation
process
Gain an understanding of both parties’ interests;
brainstorm value-maximizing solutions; identify
objective criteria to evaluate fairness of
agreement.
2. Develop
negotiation
database
Review previous negotiations to catalogue
standards, practices, precedents, metrics,
creative solutions used, and lessons learned.
3. Design
Create an environment to work together to
negotiation
create a shared vocabulary, build working
launch process relationships, and map out a shared decisionmaking process.
4. Institute
feedback
mechanism
Create process to provide feedback to
negotiating teams and capture lessons learned.
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Managing & Developing 2nd-Tier
Supplier Relationships
Successful alliance development can
indirectly create successful, high-performing
second-tier & third-tier relationships.
Organizations may require direct suppliers
to acquire goods & services from specific
suppliers & under specific conditions. They
can also work directly with supplier alliance
partners in solving second-tier supplier
problems, designing supplier selection &
certification programs.
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Managing & Developing 2nd-Tier
Supplier Relationships (Cont.)
(See Table 4.2)
Steps
1. Determine key
strategic org.
parameters
Discussion
Can be based on business units, geographic
areas, industries, etc.
3. Elevate the
importance of
the alliance
Alliance information should be centrally
controlled and available through internal
websites, pamphlets, internal experts,
workshops.
Assign high-level mgr. reporting to top
management. Establish consistent
procedures for alliance throughout the
organization.
4. Provide
continuous
evaluation
Management increases the acceptance of
alliance when successes are visible to the
firm’s lower level managers and employees.
2. Facilitate
dissemination of
information
5. Reward supplier Rewards typically include increased
performance
business and other non-monetary awards.
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Use of e-Procurement Systems
Primary benefits of e-procurement include:
– Cost savings
– Frees-up time to concentrate on core
business
E-procurement systems - concentrate large
volumes of small purchases with a few
suppliers, using e- catalogues, available to the
organization’s users.
Reverse auctions – Pre-qualified suppliers
enter Web site & at pre-designated time & date,
try to underbid competitors, monitoring bid
prices until the session is over.
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Rewarding Supplier Performance
Rewarding suppliers provides an incentive
to surpass performance goals.
Punishment, a negative reward, may be to
reduce future business; or a bill-back amount
equal to the incremental costs resulting from a
late delivery or poor quality.
Strategic supplier agreements can
reward suppliers by allowing:
– A share of the cost reductions
– More business and/or longer contracts
– Access to in-house training seminars & other
resources
– Company & public recognition
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Benchmarking Successful
Sourcing Practices
Benchmarking - copying what other
businesses do best; an effective way to
improve supply chain performance.
Benchmarking data regarding sourcing
practices can be obtained in any number of
ways, both formal & informal.
Resources to learn about &
implement sourcing practices:
– The Center for Advanced Purchasing
Studies.
– Supply-Chain Council.
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Using Third-Party Supply
Chain Management Services
Third-party logistics (3PL) is growing & may
involve a firm’s sourcing, materials management, &
product distribution responsibilities.
--
3PL providers charge a fee for services for an
estimated savings of 10 to 20% of total logistics
costs); results are improved service, quality, &
profits for their clients.
Vendor-managed inventory (VMI)
services - one of the more popular roles of 3PL.
Lead logistics provider (LLP), aka 4PL a primary 3PL provider; oversees other 3PL’s.
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Assessing & Improving
Firm’s Purchasing Function
The purchasing function is one of the
most value-enhancing functions in any
organization
-- thus, it is preferable to periodically
monitor the purchasing function’s
performance against set standards,
goals, and/or industry benchmarks.
-- Surveys or audits can be administered as
self-assessments among purchasing staff
as part of the annual evaluation process.
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Assessing & Improving
Firm’s Purchasing Function
(Cont.)
Skill set requirements of purchasing
professionals have been changing. Purchasing
personnel must today exhibit world-class skills
such as:
1. Interpersonal
6. Customer focus
communication
7. Ability to manage
2. Ability to make
change
decisions
8. Influencing &
3. Ability to work in
persuasion skills
teams
9. Strategic skills
4. Analytical skills
10. Understanding
5. Negotiation skills
business conditions
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