PROCUREMENT AND
OUTSOURCING STRATEGIES
Presented by:
Jearnmaneengam Amornsak
Kuhirunyarat Wongwanida
Jullasing Phanu
Objective
• To understand the important roles and key
issues involved in outsourcing and
procurement processes
• To be able to apply outsourcing and
procurement strategies
• To realize the impact of E-Markets in EProcurement
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 2
Presented by Jearnmaneengam Amornsak
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 3
Presented by Jearnmaneengam Amornsak
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 4
Presented by Jearnmaneengam Amornsak
Outsourcing
Introduction
• Outsourcing components have increased
progressively over the years
• Increasing the profit by reducing the cost
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 5
Presented by Jearnmaneengam Amornsak
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 6
Presented by Jearnmaneengam Amornsak
Outsourcing - Benefits and Risks
The benefits of using outsource
• Economies of scale
– Aggregation of many orders reduces costs, both in
purchasing and in manufacturing
• Risk pooling
Aggregation of the demand
– Demand uncertainty transferred
to the suppliers
across locations
likes the (CEM)
– Suppliers reduce uncertainty
through
this effect
higher
demand
is
• Reduce capital investment compensated
with the lower to reduce
– Capital investment transferred to suppliers.
the variable of demand
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 7
Presented by Jearnmaneengam Amornsak
Outsourcing - Benefits and Risks
The benefits of using outsource (Continued)
• Focus on core competency
– Buyer can focus on its core strength
– Allows buyer to differentiate from its competitors
• Increased flexibility
– The ability to better react to changes in customer demand
– The ability to use the supplier’s technical knowledge
– Critical in the industries:
• High-tech products where technologies change very
frequently
• Fashion products which have a short life cycle
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 8
Presented by Jearnmaneengam Amornsak
Outsourcing - Benefits and Risks
Outsourcing risks
• Loss of competitive knowledge
– Critical components to suppliers may open up
opportunities for competitors
– Implies that companies lose their ability to
introduce new designs
– Using many outsourcing suppliers may
obstructive the development innovations of
the organization
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 9
Presented by Jearnmaneengam Amornsak
Outsourcing - Benefits and Risks
Outsourcing risks (Continued)
• Conflicting objectives
– Demand Issues
• In a good economy
– Demand is high
– buyers require to make long-term commitments about
ordering
• In a slow economy
– Long-term commitments entail huge financial risks for the
buyers
– Product design issues
• Buyers would like to solve design problems as fast as possible
• Suppliers focus on cost reduction
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 10
Presented by Jearnmaneengam Amornsak
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 11
Presented by Kuhirunyarat Wongwanida
Outsourcing - Framework
• Manufacture or outsource ?
Analyzing the core of the business is needed
– Dependency on capacity
• The firm has the knowledge and the skill
– Dependency on knowledge
• The firm has the knowledge and the skill, but can
not effort to manufacturing
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 12
Presented by Jearnmaneengam Amornsak
Product Architectures
• Modular product
– Made by combining different components
• Components are independent of each other
• Standard interfaces are used ( i.e. PC )
• Integral product
– Made up from components whose
functionalities are tightly related
• Not made from off-the-shelf components
• Evaluated on system performance, not on
component performance ( i.e. car engines )
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 13
Presented by Jearnmaneengam Amornsak
Product Architectures
A Framework for Make/Buy Decisions
Product
Dependency on
knowledge and
capacity
Independent for
knowledge,
dependent for
capacity
Independent for
knowledge and
capacity
Modular
Outsourcing is risky
Outsourcing is an
opportunity
Opportunity to reduce
cost through
outsourcing
Integral
Outsourcing is very
risky
Outsourcing is an
option
Keep production
internal
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 14
Presented by Jearnmaneengam Amornsak
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 15
Presented by Kuhirunyarat Wongwanida
Changeover of outsourcing in
1990s
Manufacturing
Representative
Manfac. Rep.
Manfac. Rep.
Suppliers
Industrial Buyer
Buyers lack of expertise
FreeMarkets
Fragmented
supply market
Variation among suppliers
Online
Information problem for buyers to make decisions
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 16
Presented by Kuhirunyarat Wongwanida
FreeMarkets OnLine, Inc.
• Founded in 1995 and was on the verge of
breaking even in 1998.
• From $75,000 investment, company achieved
$6.0 millions revenue in 1998.
• An online market making firm that enabled
industrial buyers to link up with their potential
suppliers in a live electronic bidding.
• The result: Generated over 15% in procurement
costs saving for buyers.
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 17
Presented by Kuhirunyarat Wongwanida
The Market-Making Process
• Core Service:
– To provide on-line industrial market-making services
that culminated in real-time Competitive Bidding
Events (CBEs); 90-mins to 2-hrs.
BidWare
Functions to
monitor market
price, submit
bids, and print
report.
Suppliers
BidServer
Interne
t
Interne
t
FreeMarkets
BidWare
Functions to
monitor bidding,
and print result
report.
Buyers
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 18
Presented by Kuhirunyarat Wongwanida
Framework in Market-Making
Process
• 5 Steps in FreeMarket Online
Identify
Savings
Opportunity
Prepare
Total-cost
RFQ*
Identify
Screen,
Support
Suppliers
Conduct
OnLine
CBEs
Provide
Post-Bid
Support
Defining all elements of Request for
Analysis expenditure
and
Quotations,requirements
of drawings, volume
Training
sessions to suppliers,
Collecting
cost breakdown,
savings for buyers submittingforecast,
cost.
real-time
bids
Screening the
finalpotential
suppliersuppliers
analysis. with
buyers and supporting RFQ to suppliers
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 19
Presented by Kuhirunyarat Wongwanida
What is the value to the
Customers?
• Buyers
– Do not have to deal with manufacturers’ representatives
– Access to sourcing information that is otherwise
difficult/expensive to assemble
– Cost Savings (up to 43%, average 15%)
• Suppliers
– More opportunities to access the large industrial buyers
• Especially for small or overseas suppliers
– Lower sales and marketing costs
– Helps supplier benchmark other competitors
– Get the good perspective of marketplace
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 20
Presented by Kuhirunyarat Wongwanida
Revenue Model
• A hybrid of service fees + sales commissions
– Charged buyers a monthly service fee based on
the size of the market making team.
• Ex. Typical project with engineering work costs
$75,000/month x 2.
– Charged winning suppliers a commission fee
varied by supply industry.
• Ex. General case is 2.5% of purchase price.
• The business reached breakeven point within
3 years.
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 21
Presented by Kuhirunyarat Wongwanida
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 22
Presented by Kuhirunyarat Wongwanida
The Value Proposition
• Serving as a intermediary between buyers
and suppliers
• Increasing the number of suppliers
involved in the bidding event
• Identifying, qualifying, and supporting
suppliers
• Conduction the bidding event
• Improve supply chain efficiency
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 23
Presented by Jullasing Phanu
E-Market’s Drawbacks
• Improper to establish long-term
relationships
• Problems in transaction fee paid
– Both sellers and buyers resist paying
– Inflexible transaction fees system
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 24
Presented by Jullasing Phanu
Change in E-Market Landscape
•
•
•
•
Value-added public e-markets
Private e-markets
Consortia-based e-markets
Content-based e-markets
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 25
Presented by Jullasing Phanu
Change in E-Market Landscape
• Value-added public e-markets
• Private e-markets
E-market offers additional value-added services such as
• Consortia-based
e-marketsplanning, demand
inventory
management, distribution
forecasting etc.
• Content-based e-markets
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 26
Presented by Jullasing Phanu
Change in E-Market Landscape
•
•
•
•
Value-added public e-markets
Private e-markets
Consortia-based e-markets
Content-based e-markets
A private e-market belong to big manufacturers which
increases the manufacturers total supply chain performances.
Wal-Mart
Dell Computers
IBM
Sun Microsystems
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 27
Presented by Jullasing Phanu
Change in E-Market Landscape
• Value-added public e-markets
• Private e-markets
• Consortia-based e-markets
E-Market
in a specifice-markets
industry, providing standard
• Content-based
system necessary for the specific industry
Suppliers
Manufacturers
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 28
Presented by Jullasing Phanu
Change in E-Market Landscape
• Value-added public e-markets
•E-Market
Privateexpertise
e-markets
in miscellaneous services
such
as maintenancee-markets
and repairing.
• Consortia-based
• Content-based e-markets
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 29
Presented by Jullasing Phanu
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 30
Presented by Kuhirunyarat Wongwanida
A Framework for E-Procurement
• Types of product
– Indirect materials
– Strategic components
– Commodity products
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 31
Presented by Jullasing Phanu
A Framework for E-Procurement
• Indirect material
– Low risk
– Content-based e-markets
• Strategic components
– High risk
– Private e-market or consortia-based e-market
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 32
Presented by Jullasing Phanu
A Framework for E-Procurement
• Commodity products
– High risk
– Public e-market, private e-market, or
consortia-based e-market
– Strategy based on inventory and price
Holding
Cost
Inventory
Level
Manufacturers
Suppliers
Manufacturers
Suppliers
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 33
Presented by Jullasing Phanu
Outline
• Outsourcing
– Outsourcing Benefits and Risks
– Framework for Buy/ Make Decisions
Case Study： FreeMarkets OnLine, Inc.
• E-Procurement and E-Market

– Framework for E-Procurement
• Conclusion
Procurement and Outsourcing, Supply Chain Management, Prof. Tsao, De-bi
Page 34
Presented by Kuhirunyarat Wongwanida
Thank You
For Your Attention