Supply Chain Management: Sourcing Decisions PDF

Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 15 Sourcing Decisions in a Supply Chain Cop...

Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 15 Sourcing Decisions in a Supply Chain Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved The Sourcing Decision in a Supply Chain (1 of 2) Purchasing, also procurement, is the process by which companies acquire raw materials, components, products, services, or other resources from suppliers to execute their operations Sourcing – entire set of business processes required to purchase goods and services Outsourcing – supply chain function being performed by a third party Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved The Sourcing Decision in a Supply Chain (2 of 2) Outsourcing questions 1. Will the third party increase the supply chain surplus relative to performing the activity in- house? 2. To what extent do risks grow upon outsourcing? 3. Are there strategic reasons to outsource? Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved How Do Third Parties Increase the Supply Chain Surplus? Decisions based on supply chain surplus and risk incurred Third parties increase surplus through 1. Capacity aggregation 2. Inventory aggregation 3. Transportation aggregation by transportation intermediaries 4. Transportation aggregation by storage intermediaries 5. Warehousing aggregation 6. Procurement aggregation 7. Information aggregation 8. Receivables aggregation 9. Relationship aggregation 10.Lower costs and higher Copyright quality © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Factors Influencing Growth of Surplus by a Third Party (1 of 2) Scale – Large scale, it is unlikely that a third party can achieve further scale economies and increase the surplus Uncertainty – If requirements are highly variable over time, third party can increase the surplus through aggregation Specificity of assets – If assets required are specific to a firm, a third party is unlikely to increase the surplus Cost and quantity of available capital – Third party may have available or lower cost capital Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Factors Influencing Growth of Surplus by a Third Party (2 of 2) Table 15-1 Growth in Surplus by Third Party as a Function of Scale, Uncertainty, and Specificity Blank Blank Specificity of Assets Specificity of Assets Involved in Function (Low) Involved in Function (High) Firm scale Low High growth in surplus Low to medium growth in surplus Blank High Low growth in surplus No growth in surplus unless cost of capital is lower for third party Demand Low Low to medium growth in Low growth in surplus uncertainty surplus for firm Blank High High growth in surplus Low to medium growth in surplus Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risks of Using a Third Party 1. The process is broken 2. Underestimation of the cost of coordination 3. Reduced customer/supplier contact 4. Loss of internal capability and growth in third- party power 5. Leakage of sensitive data and information 6. Ineffective contracts 7. Loss of supply chain visibility 8. Negative reputational impact Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Strategic Factors in Sourcing 1. Support for the business strategy 2. Improve firm focus Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Total Cost of Ownership (1 of 4) Mistake to focus only on quoted price Total cost of ownership (TCO) – Includes all supply chain costs of sourcing from a particular supplier Three “buckets” – Acquisition costs – Ownership costs – Post-ownership costs Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Total Cost of Ownership (2 of 4) Table 15-2 Factors Influencing Total Cost of Ownership Performance Category Category Components Quantifiable? Acquisition Costs Blank Blank Supplier price Labor, material, and overhead Yes Supplier terms Net payment terms, delivery frequency, Yes minimum lot size, quantity discounts Taxes and duties All tariffs and compliance costs Yes Delivery costs All transportation costs from source to Yes destination, packaging costs Incoming quality costs Cost of inspection, defectives, and rework Yes Management costs Cost of managing and planning the Difficult purchase Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Total Cost of Ownership (3 of 4) Table 15-2 [Continued] Performance Category Category Components Quantifiable? Ownership Costs Blank Blank Inventory costs Supplier inventory, including raw material, Yes in process and finished goods, in-transit inventory, finished goods inventory in supply chain Warehousing cost Warehousing and material handling costs Yes to support additional inventory Manufacturing costs Cost of manufacturing associated with the Yes sourced part Production quality costs Impact of sourced part on finished product Difficult quality Cycle time costs Impact of sourced part on production cycle Yes time Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Total Cost of Ownership (4 of 4) Table 15-2 [Continued] Performance Category Category Components Quantifiable? Post-Ownership Costs Blank Blank Reputation Reputation impact of quality problems No Warranty and product Warranty and product liability costs Difficult liability costs associated with sourced part Environmental costs Environmental costs affected by sourced Difficult part Supplier capabilities Replenishment lead time, on-time To some extent performance, flexibility, information coordination capability, design coordination capability, supplier viability Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Designing a Sourcing Portfolio: Tailored Sourcing (1 of 5) Options with regard to whom and where to source from – Produce in-house or outsource to a third party – Will the source be cost efficient or responsive – Onshoring, near-shoring, and offshoring Tailor supplier portfolio based on a variety of product and market characteristics Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Designing a Sourcing Portfolio: Tailored Sourcing (2 of 5) Sources must focus on different capabilities – Cost – Responsiveness Volume-based tailored sourcing Product-based tailored sourcing Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Designing a Sourcing Portfolio: Tailored Sourcing (3 of 5) Table 15.3 Factors Favoring Selection of a Responsive or Low-Cost Source Blank Responsive Source Low-Cost Source Product life cycle Early phase Mature phase Demand volatility High Low Demand volume Low High Product value High Low Rate of product obsolescence High Low Desired quality High Low to medium Engineering/design support High Low Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Designing a Sourcing Portfolio: Tailored Sourcing (4 of 5) Table 15.4 Factors Favoring Onshoring, Near-Shoring, or Offshoring Blank Onshore Near-Shore Offshore Rate of innovation/product High Medium to High Low variety Demand volatility High Medium to High Low Labor content Low Medium to High High Volume or weight-to-value High High Low ratio Impact of supply chain High Medium to High Low disruption Inventory costs High Medium to High Low Engineering/management High High Low support Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Designing a Sourcing Portfolio: Tailored Sourcing (5 of 5) Table 15.5 Differences Between Direct and Indirect Materials Blank Direct Materials Indirect Materials Use Production Maintenance, repair, and support operations Accounting Cost of goods sold Selling, general, and administrative expenses (SG&A) Impact on production Any delay will delay Less direct impact production Processing cost relative Low High to value of transaction Number of transactions Low High Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Product Categorization Figure 15-1 Product Categorization by Value and Criticality Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved The Impact of Incentives on Third-Party Behavior Misalignment of incentives often hurts supply chain performance Alignment important – When third party actions are not fully observable – When third party has information not available to the firm Well-designed incentives can be strong communicators of desired performance “Threshold” incentives can distort information Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Sharing Risk and Reward in the Supply Chain Independent actions by two parties often result in lower profits than could be achieved Stronger firms tend to push risk on to supply chain partners Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Sharing Risk to Grow Supply Chain Profits (1 of 2) Three approaches to risk sharing increase overall supply chain profits 1. Buyback or returns 2. Revenue sharing 3. Quantity flexibility Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Sharing Risk to Grow Supply Chain Profits (2 of 2) Three questions 1. How will risk sharing affect the firm’s profits and total supply chain profits? 2. Will risk sharing introduce any information distortion? 3. How will risk sharing influence supplier performance along key performance measures? Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Buyback Contracts (2 of 2) Holding-cost subsidies – Manufacturers pay retailers a certain amount for every unit held in inventory over a given period – Encourage retailers to order more Price support – Manufacturers share the risk of product becoming obsolete – Guarantee that in the event they drop prices they will lower prices for all current inventories Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Sharing through Revenue-Sharing Revenue-sharing, manufacturer charges the retailer a low wholesale price c and shares a fraction f of the retailer’s revenue – Allows both the manufacturer and retailer to increase their profits – Results in lower retailer effort – Requires an information infrastructure – Information distortion results in excess inventory in the supply chain and a greater mismatch of supply and demand Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Sharing Using Quantity Flexibility Allows the buyer to modify the order (within limits) after observing demand Better matching of supply and demand Increased overall supply chain profits if the supplier has flexible capacity Lower levels of information distortion than either buyback contracts or revenue sharing contracts Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Sharing Rewards to Improve Performance A buyer may want performance improvement from a supplier who otherwise would have little incentive to do so A shared-savings contract provides the supplier with a fraction of the savings that result from performance improvement Effective in aligning supplier and buyer incentives when the supplier is required to improve performance and most of the benefits of improvement accrue to the buyer Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved