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feras81Supply Management and Commodity Strategy Development
Chapter 6
OSCM 3660:002 Strategic Sourcing
Spring 2016
Sandeep Jagani
PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
Click to edit Master title style
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1
Chapter Overview
Aligning supply management and enterprise objectives
What is a category strategy?
Category strategy development
Types of supply management strategies
E-reverse auctions
Evolving sourcing strategies
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Aligning Objectives
What markets will firm compete in?
On what basis?
What are the long-term and short-term business goals?
What are budgetary and economic resource constraints?
How will these be allocated to functional groups and business units?
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How Companies Create Shareholder Value
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Raise prices
Increase volume
Reduce cost of employees (downsize)
Reduce cost of process and waste
Reduce cost of goods and services
1. Increase revenues
2. Decrease costs
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Integrative Strategy Development
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Corporate strategies
Business unit strategies
Supply management strategies
Commodity/Category strategies
Integrative Strategy Development
Corporate strategies
Definition of businesses in which to participate
Acquisition and allocation of resources to these business units
Business unit strategies
Scope or boundaries of these businesses
Basis of competitive advantage
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Integrative Strategy Development
Supply management strategies
Support desired competitive business-level strategies
How to complement other functional strategies
Commodity/Category strategies
How to purchase commodities to support higher-level strategies
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Components of Integrative Strategy
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Company objectives
Cross-functional business objectives
Purchasing and supply chain goals
Purchasing and supply chain strategies
Performance measurement system
Performance measurement review
Continuous improvement
Enabling Effective Category Strategies
Spend money on resources initially, including assessment of current spend, data collection, market research, training, and people
Validate savings or contribution to other company objectives achieved by supply management and drive them to bottom line
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Enabling Effective Category Strategies
Sustain initiative through presentations to senior executives who support move towards integrated supply management function with other functional groups in supply chain
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Translating Objectives Goals
Cost reduction objectives
Be low-cost producer in industry
Reduce material costs by 15% in 1 year
Reduce levels of inventory required to supply internal customers
Reduce raw material inventory ≤ 20 days’ supply
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Translating Objectives Goals
Technology/new product development objectives
Outsource non-core competency activities
Qualify 2 new suppliers for all major services by end of fiscal year
Reduce product development time
Develop formal supplier integration process manual by 12/31
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Translating Objectives Goals
Supply base reduction objectives
Reduce number of suppliers used
Reduce total supply base by 30% in next 6 months
Joint problem solving with remaining suppliers
Identify $300,000 in cost savings with 2 suppliers by end of fiscal year
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Translating Objectives Goals
Supply assurance objectives
Assure uninterrupted supply from identified suppliers
Reduce cycle time on key parts to ≤ 1 week within 6 months
Quality objectives
Increase quality of services and products
Reduce average defects by 200 ppm on all material receipts within 1 year
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Conducting a Spend Analysis
What did the business spend its money on over the past year?
Did the business receive right amount of products and services given what it paid for them?
Sarbanes/Oxley issue
What suppliers received majority of business?
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Conducting a Spend Analysis
Did suppliers charge accurate price across all divisions vs. P.O. requirements, contracts, and SOWs?
Which divisions spent their money on products and services that were correctly budgeted for?
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Conducting a Spend Analysis
Are there opportunities to …?
Combine volumes of spending from different businesses
Standardize product requirements
Reduce number of suppliers
Exploit market conditions for better pricing
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Challenges in Conducting a Comprehensive Spend Analysis
Difficulty in obtaining timely and accurate information
Impact of mergers and acquisitions
Different recording procedures
Different accounting systems
Difficulty in translating data between systems
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Best Practices in Spend Analysis
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%
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Average Spend under management Current year cost reductions % of spending that is non- compliant % of supply base accounting for 80% of spend % of suppliers electronically enabled 60 7.2 17.5 22 39 Best-in-class Spend under management Current year cost reductions % of spending that is non- compliant % of supply base accounting for 80% of spend % of suppliers electronically enabled 82.5 15.4 8.3000000000000007 15 52
Spend Analysis Spreadsheet
Sort data by commodity
Find total spend by commodity
Chart top 10 by descending $ spend
Find number of suppliers by commodity
Chart top 10 by descending number of suppliers
Find average spend/supplier/commodity
Apply Pareto analysis for opportunities
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Sample Spend Categories
Supplier | Commodity | Annual Spend |
Rebate Company | Rebate fulfillment & call center | $329,873,663 |
Invest Company | Investments | $130,328,512 |
Advert Company | Advertising | $56,134,490 |
Repair Company | Service repairs | $49,339,218 |
Benefits Company | Benefits | $48,969,149 |
Hardware Company | Hardware | $40,572,450 |
Partco | Service parts | $39,910,372 |
Telecom | Telecommunications | $31,055,599 |
Display Company | Store displays | $30,020.969 |
Penpaper Company | Paper | $29,175,843 |
Labor Company | Contract labor | $27,880,363 |
Supply Company | Paper | $23,844,707 |
Contract Company | General contracting | $22,579,113 |
Office Company | Paper | $22,257,690 |
Graphics Company | Graphic design | $21,966,989 |
Payment Company | Business & management services | $20,380,275 |
Freight Company | Surface freight | $19,369,010 |
Paper Company | Paper | $15,603,682 |
Service Plan Company | Service plan | $15,478,827 |
Service Company | Service parts | $14,868,023 |
Consumer Company | Consumer financing | $14,833,333 |
Energy Company | Energy | $14,087,177 |
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Spend by Commodity
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Millions $
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Total Annual Spend Rebate fulfillment Advertising General contracting Hardware Investments Paper Service parts Business & mgt services Contract labor Telecommunications 340 330 175 140 135 101 100 99 98 65
Suppliers by Commodity
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# of Suppliers Advertising Small $ supplier Energy Security General contracting Business & mgt services Awards & recognition Telecommunications Building maintenance Grounds maintenance 2400 1700 900 600 450 350 300 300 250 225
Spend/Supplier by Commodity
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Spend/supplier (Million $) Appliance hauling Vacuum repair Petty cash fund Vending machines Water service Limousine services Vehicle leasing Interpretation services Floor mats Car rental 125 350 1450 2200 2250 3100 3250 3400 4200 5400
Percent of Total Spend
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Percent Rebate fulfillment Advertising General contracting Hardware Investments Paper Service parts Business services Contract labor Telecommunications 0.14000000000000001 0.13700000000000001 7.0000000000000007E-2 0.06 0.05 4.2000000000000003E-2 4.1000000000000002E-2 0.04 3.95E-2 2.4E-2
The Strategic Sourcing Process
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GOAL: Develop a statement of work and plan | GOAL: Understand the supply market | GOAL: Classify suppliers and define sourcing approach | GOAL: Negotiate a win-win contract | GOAL: Continuously improve performance |
INPUTS & TOOLS: Project leader; Other team members | INPUTS & TOOLS: Interviews; Online research; Conferences | INPUTS & TOOLS: Market research; Portfolio matrix; Forecasted spend | INPUTS & TOOLS: Negotiation plan; Supplier evaluation tool | INPUTS & TOOLS: Contract; Supplier scorecard |
OUTPUTS: Baseline data; Project charter; Work plan | OUTPUTS: Report on supply trends, changes, pricing, capacity, etc. | OUTPUTS: Supplier evaluation tool with desired relationship | OUTPUTS: Signed contract | OUTPUTS: Supplier development plan; Communication |
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Step 1
Build the Team
Step 2
Market Research
Step 5
SRM
Step 3
Strategy Development
Step 4
Contract Negotiation
Step 1: Build the Team and the Project Charter
Identify key cross-functional team members and subject matter experts
Assign knowledgeable project leader
Define scope of category strategy
Publish project charter
Develop work and communication plan
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Step 1: Build the Team and the Project Charter
Project summary document
What is prime motivation for project?
What is scope of commodity?
Who will be impacted by decision?
What is process that will be followed?
How much time and efforts will be required?
What is nature of potential savings and value created?
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Step 1: Build the Team and the Project Charter
Consider stakeholder needs
Draw map of stakeholders and verify with key stakeholders
Identify success criteria for each stakeholder
Check perceptions of each stakeholder’s success criteria
Critically review all success criteria
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Step 1: Build the Team and the Project Charter
Consider stakeholder needs (cont.)
Ensure success criteria are mutually consistent and in line with what can be delivered
Work with stakeholders to reconcile gaps and differences
Check and amend success criteria on ongoing basis
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Steps in Identifying Stakeholders
Identify and name each stakeholder
Note degree to which they are ready for change
H, M, or L
Note their capability for change
H, M, or L
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Steps in Identifying Stakeholders
Note their power (formal or informal) to make change happen
H, M, or L
Identify factors which will help or inhibit change
Identify stakeholders and factors you need to work with to make change happen
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Sample Stakeholder Map
Stakeholder | Example Needs |
Senior Management | Creation and capture of both current and future value Adherence to the corporate business strategy |
Operations | Assurance of supply and no discontinuity in deliveries Compliance to GMP quality standards |
Supply Chain Management | Reduction of temperature control deviations Inventory visibility and control of expired product |
Strategic Marketing | Product characteristics satisfying brand equity criteria Superb product quality Customizable product design |
Transactional Services | Transactional service operational efficiency Feasibility of planned information sharing arrangements |
Non-Direct Material Internal Customers | Freedom to customize specifications Lowest achievable purchase price and ownership cost |
Procurement (other) | Absence of possible negative effects on other categories and geographies |
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Stakeholder Needs Analysis Tool
Stakeholders | Example Needs | Change (H, M, L) |
Conclusions (Issues to Be Addressed) |
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Sample Change Summary
Stakeholder | Readiness | Capability | Power | ||||||
H | M | L | H | M | L | H | M | L | |
President, Division A | X | X | X | ||||||
Vice President, Marketing | X | X | X | ||||||
Senior Vice President, Finance | X | X | X | ||||||
Regional Director, Europe | X | X | X | ||||||
Regional Director, East Asia | X | X | X | ||||||
Vice President, Global Logistics | X | X | X | ||||||
Vice President, Human Resources | X | X | X | ||||||
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Level of Commitment Analysis Steps
Name individual or group stakeholders
Mark current status
Opposing the change
Passively letting it happen
Actively supporting it
Forcefully making it happen
Mark where stakeholder needs to be for project to be successful
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Sample Commitment Analysis Model
Individual (or Group) | Oppose | Let Happen | Support | Make Happen |
CEO | X √ | |||
Corporate Sourcing Council | X | √ | ||
J. Torrez | X | √ | ||
E. Alegria | X √ | |||
J. Cox | X | √ | ||
J. Gramma | √ | X |
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Key:
X = current position
√ = where needs to be
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Planning for the Team Meeting
Understanding …
Who needs to be part of team?
Who may have challenges with change?
Rationale for lack of willingness to change
Who can you count on to commit and support team?
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The Meeting Agenda
Define challenges and objectives of team
Identify sponsors at high level
Maintain communication with sourcing council and/or key stakeholders
Meet with team members individually and explain situation
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Step 2: Conduct Market Research on Suppliers
Understand purchase requirement relative to business unit objectives
Conduct thorough spend analysis
Each commodity and supplier
Total expenditures as % of total spend
Identify specific internal users
Identify current suppliers
Research supply marketplace
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Step 2: Conduct Market Research on Suppliers
Information required
Total annual purchase volumes
Interviews with stakeholders for forecasts
External market research on …
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Key suppliers | Available capacity | Technology trends |
Price data and trends | Cost data and trends | Technical requirements |
Environmental issues | Regulatory issues | Other available data |
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Step 2: Conduct Market Research on Suppliers
Triangulation – explore, compare, and contrast data from multiple sources
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Trade journals | Annual reports | Internet | Books |
Snowball sampling | Trade consultants | Category managers | Headlines |
Suppliers | Investment reports | Industry analysts | Other sources |
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Step 2: Conduct Market Research on Suppliers
Porter’s Five Forces Model
SWOT analysis
Supplier analysis
Establish benchmarks through industry databases
Requests for information
Value chain analysis
Supplier research
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Porter’s Five Forces Model
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Market Internal Competition
Threat of New Entrants
Pressure from Substitutes
Supplier Bargaining Power
Buyer
Bargaining Power
Source:
Competitive Strategy
Michael E. Porter (1980)
Other possible forces:
Globalization
Digitization
Deregulation
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Market Internal Competition
Speed of industry growth
Capacity utilization
Exit barriers
Product differences
Switching costs
Diversity of suppliers
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Threat of New Entrants
Access to capital markets
Availability of skilled workers
Access to critical technologies, inputs, or distribution
Product life cycles
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Threat of New Entrants
Brand equity and customer loyalty
Government deregulation
Risk of switching
Economies of scale
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Pressure from Substitutes
Relative performance of substitute products and services
Relative price of substitutes
Switching costs
Buyer propensity to switch
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Buyer Bargaining Power
Buyer concentration
Buyer volume
Buyer switching costs
Price sensitivity
Product differences
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Buyer Bargaining Power
Brand identity
Impact on quality or performance
Buyer profits
Availability of substitutes
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Supplier Bargaining Power
Price of major inputs
Ability to pass on price increases
Availability of key technologies or other resources
Threat of forward or backward integration
Industry capacity utilization
Supplier concentration
Importance of volume to supplier
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Sample SWOT Analysis
Strengths | Weaknesses |
Opportunities | Threats |
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Broad customer base
Established product range
Established distribution channels
Emergence of other uses and markets
Emerging overseas markets
High barriers to entry
Low product innovation
Traditional, unionized business processes
Low patent protection
Emerging overseas suppliers
New product development costs are high
Environmental regulations
Internal Factors
External Factors
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Benchmarks
Identify critical performance criteria
Identify relative competitive performance
Use of industry benchmarks
CAPS
Third party consulting firms
Use of external benchmarks
Not in same industry
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Requests for Information (RFIs)
Use before specific requisition is issued
Use to obtain general information about services, products, or suppliers
Does not constitute binding agreement
Use when large or complicated purchase is considered and when pool of suppliers must be prequalified
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Value Chain Analysis
Help identify cost savings opportunities
Provide insights to …
Origin of products
Where products end up
i.e., “cradle to grave” analysis
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Supplier Research
Cost structure
Financial status
Customer satisfaction levels
Support capabilities
Relative strengths and weaknesses
Buyer’s fit with supplier
How company is viewed
Core capabilities
Strategy/future direction
Culture
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Step 3: Strategy Development
Portfolio analysis
Critical commodity – strategic supplier
Routine commodity
Leverage commodity – preferred supplier
Bottleneck commodity – transactional supplier
Determine strategic importance of commodity to buyer
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Portfolio Analysis
Bottleneck | Critical |
Routine | Leverage |
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Complexity or Risk Impact
Value Potential
Low
Low
High
High
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Critical Commodity
Critical to profitability and operations
Few qualified sources of supply
Large expenditures
Design and quality critical
Complex and/or rigid specifications
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Critical Commodity
Strategy
Form partnership with suppliers
Tactics
Increase role of selected supplier
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Critical Commodity
Actions
Heavy negotiation
Supplier process management
Prepare contingency plans
Analyze market and competition
Use functional specifications
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Routine Commodity
Many alternative products and services
Many sources of supply
Low value, small individual transactions
Everyday use, unspecified items
Anyone could buy it
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Routine Commodity
Strategy
Simplify acquisition process
Tactics
Increase role of systems
Reduce buying effort
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Routine Commodity
Actions
Rationalize supply base
Automate requisitioning, e.g., EDI, p-cards
Stockless procurement
Minimize administrative costs
Little negotiating
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Leverage Commodity
High expenditures, commodity items
Large marketplace capacity with ample inventories
Many alternate products and services
Many qualified sources of supply
Market /price sensitive
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Leverage Commodity
Strategy
Maximize commercial advantage
Tactics
Concentrate business
Maintain competition
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Leverage Commodity
Actions
Promote competitive bidding
Exploit market cycles/trends
Procurement coordination
Use industry standards
Active sourcing
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Bottleneck Commodity
Complex specifications requiring complex manufacturing or service process
Few alternate productions/sources of supply
Big impact on operations/maintenance
New technology or untested processes
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Bottleneck Commodity
Strategy
Ensure supply continuity
Tactics
Decrease uniqueness of suppliers
Manage supply
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Bottleneck Commodity
Actions
Widen specifications
Increase competition
Develop new suppliers
Medium-term contracts
Attempt competitive bidding
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Supplier Evaluation
Capabilities
Process and design capabilities
Management capability
Financial condition and cost structure
Planning and control systems
Environmental regulation compliance
Longer-term relationship potential
Supplier selection scorecards
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Step 4: Contract Negotiation
Establishing tasks and time lines
Assigning accountabilities and process ownership
Ensuring adequate resources are made availability
Strategy communicated to all stakeholders
Market and price analysis
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Step 4: Contract Negotiation
Develop negotiation plan and ideal contract
Create contingency plan
Conduct negotiation
Sign contract
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Step 4: Contract Negotiation
Preferred supplier lists
Preference in future contracts
Proven performance and capabilities
Types of final supplier selection
Competitive bidding
Negotiation
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Price Analysis
Define marketplace
Best price
Average price
Business unit’s price
Expected trends in pricing
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Effective Competitive Bidding
Buying firm can provide qualified suppliers with clear descriptions of items or services to be purchased
Volume is high enough to justify cost and effort
Buying firm does not have preferred supplier
Price is usually dominant criterion
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Effective Negotiation
Item is new or technically complex, with only vague specifications
Purchase requires agreement on wide range of performance factors
Buyer requires supplier to participate in development effort
Supplier cannot determine risks and costs without additional buyer input
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Step 5: Supplier Relationship Management
Continuous monitoring of both strategy and supplier
Continuous monitoring of supplier’s performance using predetermined criteria on goals and objectives
Supplier scorecard
Update, usually quarterly
Review results with supplier
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Supplier Scorecards
Typical categories
Price
Quality
Delivery reliability
Responsiveness
May include feedback and input from suppliers
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Elements of the Monitoring Process
Regular review meetings to ensure that strategy is aligned with buyer’s organizational objectives
Share results with top management
Assess internal customer and supplier perceptions
Determine if key goals have been achieved
Provide feedback to those involved
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Types of Strategies
Insourcing/outsourcing
Supply base optimization
Supply risk management
Global sourcing
Longer-term supplier relationships
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Types of Strategies
Early supplier design involvement
Supplier development
Total cost of ownership
E-reverse auctions
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Insourcing/Outsourcing
Complex and strategic decision
Long-term impact
Factors
Emerging technologies
Business strategies on core competencies
Poor performance levels
Demand changes
Geographical location of demand
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Enterprise Risk Management
Greater levels of outsourcing in low cost countries
Potential for operational disruption
High cost impact
Volatility of prices
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Global Sourcing
Provide immediate and dramatic improvements in cost and quality
Introduces competition to domestic suppliers
Gain exposure to product and process technology
Increase number of sources
Establish presence in foreign markets
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Facilitating E-Reverse Auctions
Must have clearly defined specifications
Buyers and suppliers are able to communicate in real-time, worldwide, via the Internet
Development of robust, user-friendly, third-party auction systems
Significant improvements in goods and service quality and cycle time reduction
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Evolving Sourcing Strategies
Basic Beginnings | Moderate Development | Limited Integration | Fully Integrated Supply Chains |
Quality/cost teams Longer-term contracts Volume leveraging Supply base consolidation Supplier quality focus | E-reverse auctions Ad hoc supplier alliances Cross-functional sourcing teams Supply base optimization International sourcing Cross-location sourcing teams | Global sourcing Strategic supplier alliances Supplier TQM development Total cost of ownership Nontraditional purchase focus Parts/service standardization Early supplier involvement Dock-to-stock pull systems | 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 supply chain E-systems |
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Phase 1: Basic Beginnings
Supply management characterized as lower-level support function
Short-term approaches
Reactionary to complaints
Impetus for change is driven by management
Ensure adequate capacity
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Phase 1: Basic Beginnings
Adversarial supplier relationships
Limited resources for improvement
Mid-level reporting
Efficiency-related performance measures
Focus on price reduction
Transaction-based information systems
Supply base optimization
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Phase 2: Moderate Development
Some centralization of supply management function
Commodity management
Company-wide databases
Company-wide agreements
Single sourcing with long-term agreements
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Phase 2: Moderate Development
Limited cross-functional integration
Recognition of strategic supplier relationships
Evaluated on achievement of competitive objectives
Supplier viewed as resource
Informal internal integration
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Phase 3: Limited Integration
Concurrent engineering
Supplier development
Lead time reduction
Early supplier involvement
Supply management strategies integrated early in product and process design activities
2nd/3rd tier suppliers more involved
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Phase 3: Limited Integration
Supply management evaluated on strategic contribution
Extensive functional integration
Focus on building competitive advantage
Strong external customer focus
Global databases
Total cost modeling
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Phase 4: Fully Integrated Supply Chains
Supply management assumes strategic orientation
Automated non-value-adding activities
Greater focus on strategic objectives and activities
Developing global supplier capabilities
Demand higher performance from suppliers
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Phase 4: Fully Integrated Supply Chains
More aggressive development of supplier capabilities
Global suppliers
Full-service suppliers
Systems thinking approach over entire supply chain
World-class performance expectations
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Observations on Supply Management Strategy Evolution
Few organizations have fully executed complex Phase 3 and Phase 4 strategies
Relative complexity
Inadequate resources and commitment
Lack of supply base optimization effort
Personnel requiring higher level skills
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