Week 7 Global Sourcing/Procurement PDF

WEEK 7 GLOBAL SOURCING/PROCUREMENT Purchasing terms e-procurement Single sourcing versus multiple sourcing Case study of HongKong e-commerce platform for COVID Purchasing - overview Purchasing is a key business function that is responsible for acquisition of required materials, services, and equipme...

WEEK 7 GLOBAL SOURCING/PROCUREMENT Purchasing terms e-procurement Single sourcing versus multiple sourcing Case study of HongKong e-commerce platform for COVID Purchasing - overview Purchasing is a key business function that is responsible for acquisition of required materials, services, and equipment As global competition intensified, executives realized the impact of large quantities of purchased material and work-in-process inventories on manufacturing cost, quality, new product development, and delivery lead time. Managers adopted new supply chain management concepts that emphasized purchasing as a key strategic business process rather than a narrow specialized supporting function to overall business strategy. Purchasing - overview The increased strategic role of purchasing in today’s business setting has brought a need for higher levels of skill and responsibility on the part of purchasing professionals Manufacturers spend more than 50 percent of each sales dollar on raw materials. Purchases of raw materials actually exceeded value added through manufacturing Strategies are required to meet the organization’s strategic objectives Purchasing - Supply Management Supply Management is A newer term to describe the expanded set of responsibilities of purchasing professionals Institute of Supply Management defined supply management as the Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives. The Role of Supply Management The primary goals of supply management 1) Ensure uninterrupted flows of raw materials at the lowest total cost 2) Improve quality of the finished goods produced 3) Maximize customer satisfaction 4) Purchasing contributes to these objectives by: Actively seeking better materials and reliable suppliers, Working closely with and exploiting the expertise of strategic suppliers to improve quality and materials Involving suppliers and purchasing personnel in new product design and development efforts. The Purchasing Process – e Procurement The e-procurement system allows users to submit their purchase requisitions to the purchasing department electronically and enables buyers to transmit purchase orders to suppliers over electronic intermediary (Intranet, internet, email). Step 1- Material user enters a purchase request Relevant information such as quantity and date needed. The material user may recommend suppliers or potential sources for the requisition. Step 2- Purchase requisition approved and transmitted electronically to buyer This is done by the purchasing department. The Purchasing Process – e Procurement Step 3- Buyer reviews The buyer reviews the purchase requisition for accuracy and appropriate approval level If the amount is below $25,000 (for example), The buyer extracts details of the purchase requisition stored in the database to prepare an electronic purchase order The buyer assigns a preferred supplier from the e-procurement database If the amount of the purchase requisition is between $25,000 and $50,000 (for example), Two formal requests for quotation (quotes from at least two suppliers) are needed before a purchase order can be released If the amount exceeds $50,000 (for example), A supplier must be chosen by means of a formal bidding process. At the specified time and place, bids are opened publicly. The purchase is awarded to the lowest responsible bidder whose bid conforms to all requirements of the solicitation. Then an electronic purchase order is prepared and transmitted (or mailed) to the selected supplier Step 4- Buyer reviews closed bids & selects a supplier The Purchasing Process – e Procurement The Purchasing Process – e Procurement Advantages of the e-Procurement System Time savings: E-procurement is more efficient when (a) selecting and maintaining a list of potential suppliers, (b) processing requests for quotation and purchase orders, and (c) making repeat purchases Cost savings: Buyers can handle more purchases, and the manual task of matching bids to purchase requisitions is reduced Accuracy: More up-to-date information on suppliers, with goods and services readily available online, allows users to assess their options before preparing a purchase requisition Real time use: Buyers have real-time access to the purchase requisition once it is prepared. The system enables buyers to initiate bids and suppliers to respond in real time on a 24/7 basis Mobility: The buyer can submit, process, and check the status of bids, as well as communicate with suppliers regardless of the buyer’s geographical location and time of day. The Purchasing Process – e Procurement Advantages of the e-Procurement System Trackability: The e-procurement system allows submitters and buyers to track each purchase requisition electronically through the process—from submission, to approval, and finally conversion to a purchase order. Summary statistics and supplier performance reports can be generated Management benefits: The system can be designed to store important supplier information. Supplier benefits: Benefits include lower barriers to entry and transaction costs, access to more buyers, and the ability to instantly adjust to market conditions Sourcing Decisions – The Make or Buy Decision Outsourcing (not logistics outsourcing) Buying materials and components from suppliers instead of making them in-house. The trend has been moving toward outsourcing combined with the creation of supply chain relationships to replace the practice of backward or forward vertical integration (collaboration). Backward vertical integration refers to acquiring upstream suppliers Forward vertical integration refers to acquiring downstream customers The Make or Buy decision is a strategic decision Sourcing Decisions – The Make or Buy Decision Reasons for Buying or Outsourcing Cost advantage – Especially for components that are non-vital to the organization’s operations, suppliers may have economies of scale Insufficient capacity – A firm may be at or near capacity and subcontracting from a supplier may make better sense Lack of expertise – Firm may not have the necessary technology and expertise Quality – Suppliers have better technology, process, skilled labor, and the advantage of economy of scale Sourcing Decisions – The Make or Buy Decision Reasons for Making Protect proprietary technology - A firm may have developed an equipment, product, or process that needs to be protected for the sake of competitive advantage No competent supplier - If existing suppliers do not have the technology or capability to produce a component, the firm may be forced to make an item in-house Better quality control - If the firm is capable, the make option allows for the most direct control over the design, manufacturing process, labor, and other inputs to ensure that high-quality components are built Sourcing Decisions – The Make or Buy Decision Reasons for Making Use existing idle capacity - a firm with excess idle capacity is to use the excess capacity to make some of its components. Control of lead-time, transportation, and warehousing costs - The make option provides better control of lead time and logistical costs since management controls all phases of the design, manufacturing, and delivery processes Lower cost: If technology, capacity, and managerial and labor skills are available, the make option may be more economical if large quantities of the component are needed on a continuing basis. Sourcing Decisions – The Make or Buy Decision The Make-or-Buy Break-Even Analysis Find break-even point Q by setting total cost of both options equal and solving for Q: Sourcing Decisions – The Make or Buy Decision How Many Suppliers to Use The issue of how many suppliers to use for each purchased item is complex one. The current trends in sourcing favor using fewer sources, although not necessarily a single source. Theoretically, firms should use single or a few sources, whenever possible, to enable the development of close relationships with the best suppliers. However, by increasing reliance on one supplier, the firm increases its risk that poor supplier performance will result in plant shutdowns or poor-quality finished products. Sole sourcing vs. single sourcing Sole sourcing typically refers to the situation when the supplier is the only available source Single sourcing refers to the deliberate practice of concentrating purchases of an item with one source from a pool of viable suppliers. How Many Suppliers to Use Reasons Favoring a Single Supplier To establish a good relationship: a mutually beneficial strategic alliance relationship is considered Less quality variability: The same technologies and processes are used, so variability in the quality levels is less Lower cost: A single source concentrates purchase volume with the supplier, typically lowering the purchase cost per unit Transportation economies: The firm can take advantage of truckload (TL) shipments, which are cheaper per unit than the less-than-truckload (LTL) rate Proprietary product or process purchases: If the procured goods are a proprietary product or process, or if the supplier holds the patents to the product or process, this is the only option Volume too small to split: If it is a proprietary product or process, or if the supplier holds the patents to the product or process How Many Suppliers to Use Reasons Favoring Two or More Suppliers Required capacity: When demand exceeds the capacity of a single supplier Spread risk of supply interruption: Multiple sources allow the firm to spread the risk of supply interruptions due to a strike, quality problem, political instability, and other supplier problems Create competition: Using multiple sources encourages competition among suppliers in terms of price and quality Abundant Information: Multiple suppliers usually have more information about market conditions, new product developments, and new process technologies Dealing with special kinds of business: The firms, particularly government contractors, may need to give portions of their purchases to small, local, or women- or minority-owned businesses, either voluntarily or as required by law. Supply Category Management Develop Strategies Using Portfolio Analysis – Kraljic matrix A portfolio analysis uses information from the spend analysis and assessment of future needs to categorize purchases. A classic framework developed by Kraljic in 1983 is still relevant today. The framework categorizes strategies based on supply risk and the value of the total amount spent by the firm and recommends supply management strategies Supply Category Management Develop Strategies Using Portfolio Analysis Supply Category Management Supply management strategies and tactics vary by category Strategic purchase It represents a high spend level and are high risk. Typically these purchases are unique and core to the firm’s performance. Tactics—Use one or two suppliers and build partnerships with them to foster collaboration and innovation Bottleneck It represent purchases are high risk and low spend and typically are not core to the firm’s performance, but lack of availability can cause delays. Tactics—Use at least two suppliers to assure supply, develop new suppliers, and explore using different materials. Supply Category Management Leverage It represents purchases are low risk but represent a high level of spend. Tactics - Standardize purchases across the company, use competition to select suppliers, and consolidate purchases with one or a few suppliers to get discounts. Noncritical items It represents typically a low percentage of overall spend and have little impact on performance. Tactics—Use vendor-managed inventory and allow users to make their own purchases using online catalogs or corporate credit cards (called purchasing cards) to lower the transaction costs of purchasing. * Vendor managed inventory (VMI) – Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer HKTVmall with a COVID – a case study In early stages of COVID-19 pandemic, demand for online shopping surged, causing supply chain issues. Hong Kong faced shortage of PPE (Personal Protective Equipment) like masks and disinfectant, leading to soaring prices and long queues. HKTVmall, a leading e-commerce platform, worked to stabilize PPE supply by contacting local sellers and exploring new suppliers in Southeast Asia. Efforts faced challenges as many countries restricted PPE exports, exacerbating shortage. HKTVmall needs to address shortage Options include letting market equilibrium restore supply-demand balance or; having new suppliers or; Producing its own masks What are the pros and cons of these three options? HKTVmall with a COVID – a case study HKTV (Hong Kong Technology Venture) It started as a phone service, then became internet provider, TV producer, and now an online shopping platform. E-commerce growth in Hong Kong lagged due to quality control issues, proximity of physical stores, high shipping fees, and long shipping times. Ricky Wong, CEO of HKTVmall, believed e-commerce could thrive in Hong Kong with proper quality supply. Wong implemented an offline-to-online (O2O) store strategy to encourage online shopping and enable self-pickup. HKTVmall invested in advanced warehousing, logistics, and delivery systems to reduce shipping fees and times. HKTV eventually became the dominant player in the market by offering a highquality e-commerce experience for both consumers and sellers. HKTVmall with a COVID – a case study COVID-19 COVID-19 outbreak hit Hong Kong soon after emerging in mainland China in late 2019. Border entries closed from January 27, 2020; complete closure to non-local residents by mid-March. In the initial wave, Hong Kong fared better due to pre-existing mask-wearing and disinfection practices from past epidemics like SARS. Despite WHO initially advising against mask use, mask-wearing became common in Hong Kong. Surge in demand for masks and PPE early in pandemic; estimated need for 5 million disposable masks daily. Long queues and price hikes observed; for instance, price for a box of 50 masks surged from HK$100 to HK$500 in January. Hong Kong Consumer Council urged firms not to exploit shortage, citing previous prices of masks around HK$2 in 2017. HKTVmall with a COVID – a case study SHORTAGE: WAIT, BUY, OR MAKE? Global shortage of masks and medical supplies highlighted by WHO in 2020. HKTVmall sold a record 4.5 million masks in January 2020 alone. Immediate steps taken by HKTVmall investigating current supplier inventories lowering commission fees on masks and medical supplies from 25% to 5%, exploring new suppliers in Southeast Asia. Efforts limited due to rising global demand and export restrictions imposed by many countries. Foreign markets unable to provide significant support for Hong Kong's PPE needs. HKTVmall faced three decision point 1) adopt wait-and-see approach 2) develop new local supply 3) produce masks HKTVmall with a COVID – a case study Option 1: Wait-and-See Approach Wong views HKTVmall as a landlord, not retailer, but current situation demands action. Easy option: Adopt wait-and-see approach. Shortage expected to resolve naturally; e-commerce platform not expected to intervene. HKTVmall with a COVID – a case study Option 2: Develop Own Supply Contract directly with new local producers. HK government considering subsidies for local production. HKTVmall can provide established distribution channel and logistic support to new sellers. However, this are concerns about credibility of new suppliers so quality inspection by HKTVmall staff is necessary. HKTVmall with a COVID – a case study Option 3: Producing Own Masks HKTVmall produces own masks instead of sourcing from vendors. Small-scale production manageable Provides flexibility in production and distribution. Ensures quality control essential for combating COVID-19. Opportunity to brand products with HKTVmall logo, enhancing local support awareness. Class activity What are the pros and cons of these three options?