chapter 15: Strategy, planning, operations

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Questions and Answers

According to Table 15-1, which condition is LEAST likely to result in growth in surplus when using a third party?

  • Low Demand Uncertainty for the firm combined with Low Specificity of Assets
  • High Demand Uncertainty for the firm combined with Low Specificity of Assets
  • Low Firm Scale combined with Low Specificity of Assets
  • High Firm Scale combined with High Specificity of Assets (correct)

Focusing solely on the quoted price from a supplier is a comprehensive approach to determining the best sourcing strategy.

False (B)

Which of the following acquisition cost components typically involves assessing expenses related to tariffs and adherence to regulatory requirements?

  • Incoming Quality Costs
  • Taxes and Duties (correct)
  • Supplier Price
  • Delivery Costs

Name three distinct categories considered in Total Cost of Ownership analysis.

<p>Acquisition costs, Ownership costs and Post-ownership costs</p> Signup and view all the answers

One risk of using a third party is the potential for the ______ of sensitive data and information.

<p>leakage</p> Signup and view all the answers

Management costs associated with a purchase are easily quantifiable.

<p>False (B)</p> Signup and view all the answers

Match each risk with its potential consequence when using a third-party:

<p>Process is broken = Inefficient Operations Underestimation of coordination cost = Budget Overruns Loss of internal capability = Reduced Innovation Negative reputational impact = Decreased Customer Trust</p> Signup and view all the answers

What category of ownership costs includes expenses related to storing and moving additional stock?

<p>Warehousing cost</p> Signup and view all the answers

The effect of a sourced component on the quality of the completed item is captured under the category of ______ quality costs.

<p>production</p> Signup and view all the answers

Match the following performance categories with their respective components:

<p>Acquisition Costs = Supplier price, supplier terms, taxes and duties, delivery costs, incoming quality costs, management costs Ownership Costs = Inventory costs, warehousing cost, manufacturing costs, production quality costs, cycle time costs</p> Signup and view all the answers

Which of the following post-ownership costs is NOT directly listed as being impacted by sourcing decisions?

<p>Production costs (C)</p> Signup and view all the answers

A low-cost source is generally favored when the rate of product obsolescence is high.

<p>False (B)</p> Signup and view all the answers

In the context of designing a sourcing portfolio, what are two primary options regarding whom to source from?

<p>Produce in-house or outsource to a third party</p> Signup and view all the answers

When demand volatility is ______, a responsive source is typically favored over a low-cost source.

<p>high</p> Signup and view all the answers

Match the following factors with the type of source they typically favor:

<p>Early product life cycle = Responsive Source Low demand volume = Responsive Source Mature product life cycle = Low-Cost Source High demand volume = Low-Cost Source</p> Signup and view all the answers

Which of the following best describes 'sourcing' in the context of supply chain management?

<p>The entire set of business processes required to purchase goods and services. (C)</p> Signup and view all the answers

Outsourcing always guarantees an increase in the supply chain surplus.

<p>False (B)</p> Signup and view all the answers

Name three factors that enable third parties to increase the supply chain surplus.

<p>Capacity aggregation, inventory aggregation, information aggregation</p> Signup and view all the answers

__________ involves having a supply chain function performed by a third party.

<p>Outsourcing</p> Signup and view all the answers

Which of the following is a primary consideration when deciding whether to outsource a supply chain function?

<p>Whether the third party will increase the supply chain surplus. (D)</p> Signup and view all the answers

A company is considering outsourcing its warehousing operations. Under which condition is a third party LEAST likely to increase the supply chain surplus?

<p>The company requires highly specialized warehousing equipment tailored to its unique products. (A)</p> Signup and view all the answers

Match the type of aggregation with its supply chain benefit.

<p>Capacity Aggregation = Avoids the costs of having excess capacity. Inventory Aggregation = Lowers overall safety stock requirements. Transportation Aggregation = Achieves economies of scale in shipping. Procurement Aggregation = Increases purchasing power with suppliers.</p> Signup and view all the answers

If a company's asset needs for a specific task are highly specific, outsourcing that task is more likely to result in an increased supply chain surplus.

<p>False (B)</p> Signup and view all the answers

Which factor most strongly favors offshoring over near-shoring or onshoring?

<p>High labor content (A)</p> Signup and view all the answers

Direct materials are more likely to delay production if there are supply issues compared to indirect materials.

<p>True (A)</p> Signup and view all the answers

What type of expense are indirect materials categorized under in accounting?

<p>Selling, general, and administrative expenses (SG&amp;A)</p> Signup and view all the answers

Onshoring is preferred when the rate of innovation is ______.

<p>high</p> Signup and view all the answers

Match the sourcing location strategies with the factors that favor them:

<p>Onshoring = High volume-to-weight ratio Near-Shoring = Medium to High demand volatility Offshoring = Low impact of supply chain disruption</p> Signup and view all the answers

Which of the following is a potential negative consequence of using 'threshold' incentives with third parties?

<p>Distorted information (A)</p> Signup and view all the answers

Stronger firms within a supply chain generally prefer to absorb risk rather than push it onto their supply chain partners.

<p>False (B)</p> Signup and view all the answers

Name two situations where aligning incentives with third parties is particularly important for a firm.

<p>when their actions arnt fully observable, when they have information not available to the firm</p> Signup and view all the answers

In a revenue-sharing agreement, the manufacturer charges the retailer a low ______ price and shares a fraction of retailer's revenue.

<p>wholesale</p> Signup and view all the answers

Which of the following is NOT one of the three approaches mentioned for risk sharing to increase overall supply chain profits?

<p>Price discounts (B)</p> Signup and view all the answers

Match the following risk-sharing strategies with their description:

<p>Buyback contracts = Manufacturers repurchase unsold goods from retailers. Revenue Sharing = Manufacturer receives a percentage of retailer's sales. Quantity flexibility = Supplier allows the buyer to modify the order quantity within agreed limits.</p> Signup and view all the answers

What is a potential drawback of revenue-sharing agreements between a manufacturer and a retailer?

<p>Results in lower retailer effort (C)</p> Signup and view all the answers

What are holding-cost subsidies designed to encourage retailers to do?

<p>order more</p> Signup and view all the answers

Flashcards

Purchasing

The process of acquiring raw materials and services from suppliers.

Sourcing

The entire set of business processes required to purchase goods and services.

Outsourcing

Having supply chain functions performed by a third party.

Supply Chain Surplus

The value created in a supply chain, typically through efficiency or reduction of costs.

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Factors Influencing Surplus Growth

Key determinants that affect how a third party increases supply chain surplus.

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Capacity Aggregation

Combining demands from multiple sources to increase supply chain efficiency.

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Risk in Outsourcing

The potential dangers or losses involved when contracting out supply chain functions.

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Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation.

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Growth in Surplus

The increase in financial surplus influenced by firm scale and asset specificity.

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Risks of Third-Party Use

Potential negative outcomes from utilizing external suppliers, such as loss of control or leakage of data.

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Strategic Sourcing

Aligning sourcing strategies with business goals to enhance focus and effectiveness.

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Total Cost of Ownership (TCO)

Comprehensive assessment of all costs associated with sourcing from a supplier, beyond just the price.

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Components of TCO

Includes acquisition, ownership, and post-ownership costs related to supplier sourcing.

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Acquisition Costs

Total costs incurred to acquire goods and services, including various expenses.

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Delivery Costs

All expenses related to transporting goods from the supplier to the buyer.

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Inventory Costs

Costs associated with holding inventory, including raw and finished goods.

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Warehousing Costs

Costs related to storing inventory and managing materials.

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Management Costs

Expenses incurred in planning and overseeing the purchasing process.

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Post-Ownership Costs

Costs that arise after a product is purchased, including reputation, warranty, and environmental costs.

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Responsive Sourcing

Selecting suppliers based on their ability to react quickly to changes in demand and product specifications.

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Low-Cost Sourcing

Selecting suppliers primarily based on their ability to provide goods at the lowest possible cost.

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Product Life Cycle Impact

The phase of a product's life affects whether a responsive or low-cost source is chosen.

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Volume-Based Tailored Sourcing

Sourcing strategy that adjusts supplier selection based on different demand volumes.

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Onshoring

The practice of relocating business processes to the company’s home country.

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Near-Shoring

Outsourcing operations to nearby countries to reduce risks and costs.

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Offshoring

The practice of relocating business operations to distant countries.

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Direct Materials

Materials used directly in the production of goods.

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Indirect Materials

Materials not directly tied to production, used for maintenance or support.

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Misalignment of Incentives

When incentives do not match desired outcomes, harming performance.

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Importance of Alignment

Essential when third-party actions are unobservable or possess unique information.

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Well-Designed Incentives

Incentives that effectively communicate desired performance outcomes.

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Threshold Incentives

Incentives that can create misinformation or distort perceptions.

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Risk Sharing Models

Approaches that increase collaboration and profits in supply chains.

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Buyback Contracts

Agreements where manufacturers reimburse retailers for unsold inventory.

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Revenue Sharing

A contractual method where earnings are shared between parties, linking their fortunes.

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Information Infrastructure

The necessary systems that allow data sharing and communication between partners.

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Study Notes

Sourcing Decisions in a Supply Chain

  • Purchasing, also known as procurement, is the process companies use to acquire raw materials, components, products, services, or resources from suppliers to operate.
  • Sourcing is the complete set of business processes needed to acquire goods and services.
  • Outsourcing is a supply chain function performed by a third party.

Outsourcing Questions

  • Will a third party supplier increase supply chain surplus compared to in-house provision?
  • To what extent does outsourcing increase risks?
  • Are there strategic reasons to outsource?

How Do Third Parties Increase Supply Chain Surplus?

  • Third party suppliers increase supply chain surplus through various aggregations:
    • Capacity aggregation
    • Inventory aggregation
    • Transportation aggregation by transportation intermediaries
    • Transportation aggregation by storage intermediaries
    • Warehousing aggregation
    • Procurement aggregation
    • Information aggregation
    • Receivables aggregation
    • Relationship aggregation

Factors Influencing Growth of Surplus by a Third Party

  • Scale: Unlikely for a third party to achieve further economies of scale and increase surplus.
  • Uncertainty: Highly variable requirements over time hinder third-party surplus growth.
  • Specificity of assets: If assets are specific to a firm, a third-party is unlikely to enhance surplus.
  • Cost and quantity of available capital: Third parties may access capital or have lower capital costs.

Table 15-1 (Growth in Surplus by Third Party)

  • Shows how growth in surplus depends on firm scale, demand uncertainty, and asset specificity.
  • Different outcomes are shown depending on the specific combination of firm scale, demand uncertainty, and asset specificity.

Risks of Using a Third Party

  • Process breakdowns
  • Underestimation of coordination costs
  • Reduced customer/supplier contact
  • Loss of internal capabilities and growth of third-party power
  • Leakage of sensitive data and information
  • Ineffective contracts
  • Loss of supply chain visibility
  • Negative reputational impact

Strategic Factors in Sourcing

  • Support for the business strategy
  • Improve firm focus

Total Cost of Ownership (TCO)

  • Focusing solely on quoted price is a mistake.
  • TCO includes all supply chain sourcing costs for a particular supplier.
  • Categorized into acquisition costs, ownership costs, and post-ownership costs.

Table 15-2 (Factors Influencing Total Cost of Ownership)

  • Acquisition Costs (quantifiable):
    • Supplier price
    • Supplier terms
    • Taxes and duties
    • Delivery costs
    • Incoming quality costs
    • Management costs (difficult)
  • Ownership Costs (quantifiable):
    • Inventory costs
    • Warehousing costs
    • Manufacturing costs
    • Production quality costs
    • Cycle time costs

Table 15-2 (Continued) - Post-Ownership Costs

  • Post-Ownership Costs (quantifiable to some extent):
    • Reputation
    • Warranty and product liability costs (difficult)
    • Environmental costs (difficult)
    • Supplier capabilities (to some extent)

Designing a Sourcing Portfolio: Tailored Sourcing

  • Options: in-house production or outsourcing to a third party; cost-efficiency or responsiveness; onshoring, near-shoring, offshoring .
  • Tailor supplier portfolio to product and market characteristics.

Sources Must Focus On Capabilities

  • Cost

  • Responsiveness

  • Volume-based tailored sourcing

  • Product-based tailored sourcing

Table 15.3 (Factors Favoring Selection)

  • Shows which factors favor selection of responsive or low-cost sourcing compared to product life cycle, demand volatility, demand volume, product value, rate of product obsolescence, desired quality, and engineering/design support.

Table 15.4 (Factors Favoring Onshoring)

  • Shows factors favoring onshoring, near-shoring, and offshoring based on innovation, demand volatility, labor content, ratio and more.

Table 15.5 (Differences Between Direct and Indirect Materials)

  • Shows some key differences between direct and indirect materials, including use, accounting, impact on production, processing cost relative to value of transaction and number of transactions.

Figure 15-1 (Product Categorization)

  • A graphical representation of Product Categorization by Value and Criticality.

The Impact of Incentives on Third-Party Behavior

  • Misalignment of incentives can harm supply chain performance.
  • Alignment of incentives is essential.
  • Third-party observation and information availability are crucial.
  • Well-designed incentives are powerful performance communicators.
  • Threshold incentives can distort information.

Sharing Risk and Reward in the Supply Chain

  • Independent actions often lead to lower profits than possible.
  • Powerful firms often push risk onto their supply chain partners.

Sharing Risk to Grow Supply Chain Profits

  • Three risk-sharing approaches increase overall supply chain profits.
    • Buyback or returns
    • Revenue Sharing
    • Quantity Flexibility
  • Three crucial questions regarding risk-sharing effects on profits, information distortion, and supplier performance are addressed.

Buyback Contracts

  • Manufacturers compensate retailers for holding inventory.
  • Encourages greater inventory ordering
  • Manufacturers share the risk of product obsolescence and provide price support.

Risk Sharing through Revenue-Sharing

  • Manufacturers charge a low price and share a fraction of retailer's revenue.
    • This boosts profits for both parties
    • Retailer's effort may decrease, leading to excessive inventory.
      • Information infrastructure support is needed.
  • Information distortion may create excessive inventory and mismatches between supply and demand.

Risk Sharing Using Quantity Flexibility

  • Allows buyers to adjust orders within limits, better aligning supply with demand.
  • Increased profits possible if suppliers have flexible capacity.
  • Reduced information distortion compared to other methods.

Sharing Rewards to Improve Performance

  • Shared-savings contracts incentivize supplier performance improvements.
  • Profits are shared to motivate suppliers.
  • Aligning buyer and supplier incentives.

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