SCM 4th mod

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© 2007 Pearson Education 13-1

Sourcing Decisions in a Supply Chain




Outline

The Role of Sourcing in a Supply Chain

Supplier Scoring and Assessment

Supplier Selection and Contracts

Design Collaboration

The Procurement Process

Sourcing Planning and Analysis

Making Sourcing Decisions in Practice

Summary of Learning Objectives




The Role of Sourcing

in a Supply Chain

Sourcing is the set of business processes required

to purchase goods and services

Sourcing processes include:

± Supplier scoring and assessment

± Supplier selection and contract negotiation

± Design collaboration

± Procurement± Sourcing planning and analysis




Benefits of Effective

Sourcing Decisions

Better economies of scale can be achieved if ordersare aggregated

More efficient procurement transactions cansignificantly reduce the overall cost of purchasing

Design collaboration can result in products that areeasier to manufacture and distribute, resulting inlower overall costs

Good procurement processes can facilitatecoordination with suppliers

Appropriate supplier contracts can allow for thesharing of risk

Firms can achieve a lower purchase price byincreasing competition through the use of auctions




Supplier Scoring and Assessment

Supplier performance should be compared on the

basis of the supplier¶s impact on total cost

There are several other factors besides purchase price

that influence total cost




Supplier Assessment Factors

Replenishment Lead Time

On-Time Performance

Supply Flexibility

Delivery Frequency /

Minimum Lot Size

Supply Quality

Inbound Transportation Cost

Pricing Terms

Information Coordination

Capability

Design CollaborationCapability

Exchange Rates, Taxes,

Duties

Supplier Viability



© 2007 Pearson Education


Replenishment Lead Time: more the lead time,

more would be safety inventory

On-Time Performance: performance at the

scheduled time

Supply Flexibility: the amount of variation in order

quality that a supplier can tolerate without letting

other performance factors deteriorate.Delivery Frequency / Minimum Lot Size: these

two affects the replenishment not ordered. As the

replenishment lot size grows, the cycle inventory

grows and thus the handling costs. 13-7





13-8

Supply Quality: the quality affects the lead time

because the follow up orders often need to be fulfilled

to replace defective products.

Inbound Transportation Cost

Pricing Terms: This includes the inbound

transportation cost of bringing material in from the

supplier.

Information Coordination Capability: Goodinformation coordination results in better replenishment

planning, thus decreases inventory carried as well as the

sales lost because of lack of availability.





Design Collaboration Capability: As designs and

manufacture of components are outsourced, the

ability to coordinate design across many suppliers is

critical to ultimate success of the product and itsintroduction.

Exchange Rates, Taxes, Duties

Supplier Viability: Given the impact that suppliershave on a company¶s performance, an important

factor in picking a supplier is the likelihood that it

will be around to fulfill the promises it makes.

13-9




Supplier Selection- Auctions and

Negotiations

Supplier selection can be performed through competitive

bids, reverse auctions, and direct negotiations

Supplier evaluation is based on total cost of using a

supplier Auctions:

± Sealed-bid first-price auctions

± English auctions

± Dutch auctions

± Second-price (Vickery) auctions




Types of Auctions

Sealed-bid first-price auctions: It requires each potential

supplier to submit a sealed bid for the contract by a specified

time. These bids are then opened and the contract is assigned to

the lowest bidder.

English auctions: the auctioneer starts with a price and suppliers

can make bids as long as each successive bids is lower than the

previous bid. The supplier with the last( lowest) bid receives the

contract.

Du

tch au

ctions:the auctioneer starts with a low price and then

raises it slowly until one of the suppliers agrees t the contract at

that price.

Second-price (Vickery) auctions: The contract is assigned to the

lowest bidder but at the price quoted by the second-lowest bidder.

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Design Collaboration

50-70 percent of spending at a manufacturer isthrough procurement

80 percent of the cost of a purchased part is fixed in

the design phaseDesign collaboration with suppliers can result in

reduced cost, improved quality, and decreased time tomarket

Important to employ design for logistics, design for manufacturability

Manufacturers must become effective designcoordinators throughout the supply chain




The Procurement Process

The process in which the supplier sends product inresponse to orders placed by the buyer

Goal is to enable orders to be placed and delivered on

schedule at the lowest possible overall costTwo main categories of purchased goods:

± Direct materials: components used to makefinished goods

± Indirect materials: goods used to support theoperations of a firm

� In addition to the categorization of materials intodirect and indirect, all products purchased may alsobe categorized as follows:




Procurement process

Focus for direct materials should be on improvingcoordination and visibility with supplier

Focus for indirect materials should be on decreasingthe transaction cost for each order

Procurement for both should consolidate orderswhere possible to take advantage of economies of scale and quantity discounts

13-14




Product categorization by value

and criticality

13-15

Value/CostLow High

High

Low

Critical

Critical Item

General Items

Strategic items

Bulk Purchase

Items




Sourcing Planning and Analysis

A firm should periodically analyze its procurementspending and supplier performance and use thisanalysis as an input for future sourcing decisions

Procurement spending should be analyzed by partand supplier to ensure appropriate economies of scale

Supplier performance analysis should be used to builda portfolio of suppliers with complementary strengths

± Cheaper but lower performing suppliers should be used tosupply base demand

± Higher performing but more expensive suppliers should beused to buffer against variation in demand and supplyfrom the other source




Third and Fourth Party Logistics

A third party logistics (3PL) provider performs one

or more of the logistics activities relating to the flow

of product, info, and funds that could be performed by

the firm itself.

Traditionally focused on transportation, warehousing

and information technology within the supply chain.

13-17




Services provided by 3PLs

13-18

Service Category Basic Services Value added Services

Transportation Inbound, outbound

by any mode

Mode conversion,

dispatch, freight pay

etc

Warehousing Storage, facilities

management

Cross-docks, in-

transit merge,

pick/pack, labeling,

home delivery of

catalog orders

IT Provide and maintain

advanced info/

computer systems

Worldwide track,

global visibility,

freight bill payments




Service Category Basic services Value added services

Reverse Logistics Handle reverse

flows

Recycling, used-

asset disposition,customer returns,

returnable container

management, repair.

Other 3 PL services Brokering, purchase-

order management,

loss and damage

claims, port services,

export crating,

handling hazardousmaterial 13-19




Fourth Party Logistics (4PL)

The term 4PL is generally considered to have been

introduced by Accenture, which registered it as

a trademark in 1996.

Accenture described the 4PL as an "integrator thatassembles the resources, capabilities, and technology

of its own organization and other organizations to

design, supply chain solutions³

3 PL targets on the function and 4 PL targets

management of the entire process.

13-20




The Role of Revenue Management

in the Supply Chain

Revenue management is the use of pricing to increase

the profit generated from a limited supply of supply

chain assets

Supply assets exist in two forms: capacity andinventory

Revenue management may also be defined as the use

of differential pricing based on customer segment,

time of use, and product or capacity availability to

increase supply chain profits

Most common example is probably in airline pricing




The Role of Revenue Management

in the Supply Chain

Revenue management has a significant impact on the

supply chain profitability when one or more of the

following 4 conditions are met:

The Value of product varies in different marketsegments

The product is highly perishable or product wastage

occurs

Demand has seasonal peaks

The product is sold both in bulk and on the spot

market.

13-22




Conditions Under Which Revenue

Management Has the Greatest Effect

The value of the product varies in different marketsegments (Example: airline seats)

The product is highly perishable or product waste

occurs (Example: fashion and seasonal apparel)Demand has seasonal and other peaks (Example:

products ordered at Amazon.com)

The product is sold both in bulk and on the spot

market (Example: owner of warehouse who candecide whether to lease the entire warehouse throughlong-term contracts or save a portion of thewarehouse for use in the spot market)




Revenue Management for

Multiple Customer Segments

If a supplier serves multiple customer segments with

a fixed asset, the supplier can improve revenues by

setting different prices for each segment

Prices must be set with barriers such that the segment

willing to pay more is not able to pay the lower price

The amount of the asset reserved for the higher price

segment is such that the expected marginal revenuefrom the higher priced segment equals the price of the

lower price segment




Revenue Management

for Perishable Assets

Any asset that loses value over time is perishable

Examples: high-tech products such as computers and

cell phones, high fashion apparel, underutilized

capacity, fruits and vegetables

Two basic approaches:

± Vary price over time to maximize expected revenue

± Overbook sales of the asset to account for cancellations




Revenue Management

for Perishable Assets

Overbooking or overselling of a supply chain asset is

valuable if order cancellations occur and the asset is

perishable

The level of overbooking is based on the trade-off

between the cost of wasting the asset if too many

cancellations lead to unused assets and the cost of

arranging a backup if too few cancellations lead to

committed orders being larger than the available

capacity




Revenue Management

for Seasonal Demand

Seasonal peaks of demand are common in many supply

chains

Examples: Most retailers achieve a large portion of

total annual demand in December (Amazon.com)

Off-peak discounting can shift demand from peak to

non-peak periods

Charge higher price during peak periods and a lower price during off-peak periods




Revenue Management for

Bulk and Spot Customers

Most consumers of production, warehousing, and

transportation assets in a supply chain face the problem of

constructing a portfolio of long-term bulk contracts and

short-term spot market contracts

The basic decision is the size of the bulk contract

The fundamental trade-off is between wasting a portion of

the low-cost bulk contract and paying more for the asset on

the spot market

Given that both the spot market price and the purchaser¶s

need for the asset are uncertain, a decision tree approach as

discussed in Chapter 6 should be used to evaluate the

amount of long-term bulk contract to sign




Using Revenue Management

in Practice

Evaluate your market carefully

Quantify the benefits of revenue management

Implement a forecasting process

Apply optimization to obtain the revenue

management decision

Involve both sales and operations

Understand and inform the customer

Integrate supply planning with revenue

management




Summary of Learning Objectives

What is the role of sourcing in a supply chain?

What dimensions of supplier performance affect

total cost?

What is the effect of supply contracts on supplier

performance and information distortion?

What are different categories of purchased

products and services? What is the desired focusfor procurement for each of these categories?

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SCM 4th mod