Global Sourcing BA_BAET_2_3 Students Winter 2024 PDF

B.A. Business Administration International Management Global Sourcing (BA/BAET 2/3) Students Version – Edition Winter 2024 ISM Winter 2024 1 Imprint It is prohibited to use the script, even parts of it, without a prior approval by the unive...

B.A. Business Administration International Management Global Sourcing (BA/BAET 2/3) Students Version – Edition Winter 2024 ISM Winter 2024 1 Imprint It is prohibited to use the script, even parts of it, without a prior approval by the university outside the ISM or in courses undertaken by the ISM. Responsible for the content of this script is the author or are the authors. Scripts are not quotable in scientific work. ISM International School of Management GmbH Otto-Hahn-Str. 19 44227 Dortmund www.ism.de For feedback, or improvements please contact: Prof. Dr. Erich Groher [email protected] ISM Winter 2024 2 Global Sourcing Module Overview ISM Winter 2024 3 Global Sourcing Course Description ISM COURSE HANDBOOK ISM Winter 2024 4 Global Sourcing The lecture Global Sourcing includes different learning methods. Inverted Lecture presentation classroom Online Videos Survey (optional) Live Demo Case Studies (optional) Group Kahoot exercises (optional) ISM Winter 2024 5 Global Sourcing Literature van Weele, A.J. (2018), Purchasing and Supply Chain Management, Cengage Learning Weigel, U.; Rücker, M. (2017), The Strategic Procurement Practice Guide, Springer International Publishing Schupp, F.; Wöhner, H. (2020), The Nature of Purchasing, Springer International Purchasing Zsidisin, G,; Gaudenzi, B.; Pellegrino R. (2024), Strategic Sourcing, Springer Nature Switzerland Oshri, I.; Kotlarsky, J.; Willcocks, L. (2024) Global Outsourcing and Offshoring, Springer Internatioinal Purchasing ISM Winter 2024 6 Global Sourcing Work Environment, Work Load, and Exam 1) Professional Work Environment Punctuality and presence until end of lecture Mobile phones, smart-phones, PDAs must be completely switched off !!!!!!! 2) Work Load Class attendance constitutes only a minor share of the total work load. An additional 2.5 to three hours of preparation, wrap-up and exam preparation is required for each hour in class 3) Exam Written module exam, calculators allowed Active participation in the course and preparation of the exercises are THE way to prepare for the exam! Questions?  Very welcome, anytime! ISM Winter 2024 7 Global Sourcing - Agenda 01 Principles of Sourcing 04 Negotiation 1.1 Terms and Meanings 4.1 Principles 1.2 Sourcing Objectives 4.2 Negotiation Process 1.3 Outsourcing 4.3 Types and Tactics 1.4 Make-or-Buy 4.4 Global Issues 02 Global Sourcing 05 Supplier Selection 2.1 Globalization Trends 5.1 Offer Comparison 2.2 Approach of Companies 5.2 Qualitative Criteria 2.3 Opportunities and Threats 5.3 Total Cost of Ownership 2.4 Factor Cost Calculation 5.4 Contract 03 Sourcing 06 Operational Procurement 3.1 Sourcing Process 6.1 Customs 3.2 Specifications 6.2 Incoterms 3.3 Supplier Research 6.3 Order and Supply 3.4 Sourcing Methods 6.4 Process Mining in P2P ISM Winter 2024 8 1 Principles of Sourcing 01 Principles of Sourcing 1.1 Terms and Meanings 1.2 Objectives 1.3 Outsourcing 1.4 Make-or-Buy ISM Winter 2024 9 1 Principles of Sourcing When you 1. Provide a definition for the basic terms complete 2. Know the objectives of sourcing and the basic this chapter levers of cost optimization you should 3. Describe the effects of outsourcing be able to: 4. Perform make-or-buy decisions ISM Winter 2024 10 1.1 Terms and Meanings 01 Principles of Sourcing 1.1 Terms and Meanings 1.2 Objectives 1.3 Outsourcing 1.4 Make-or-Buy ISM Winter 2024 11 1.1 Terms and Meanings  Sourcing is the process of finding suppliers of goods or services  Procurement, often called Purchasing, is the activities associated with establishing the relationship between supplier and customer  Supply, sometimes called Inbound Logistics, is involved with the timing, quantities and location of goods and services ISM Winter 2024 12 1.1 Terms and Meanings Buying Behavior: Industrial versus Consumer Markets Aspect Industrial market Consumer market Buying objective Enable production Personal need satisfaction Buying motive Mainly rational Also emotional Purchasing function Professional buying Consumers Many persons involved, much Often impulsive, without Decision making discussion consulting others Negotiations, intense Often without negotiation, little Characteristics interaction interaction Product/Market knowleg. Large Limited Order size Often large Mostly small Demand Derived, fluctuation Autonomous, relatively stable Price elasticity Rather inelastic Rather elastic Number of customers Mostly limited Very large Sometimes large geographic Spread of customers Large spread concentration ISM Winter 2024 13 1.1 Terms and Meanings Some terms and their meanings (1/2) Depending on the author and source used, terms have different meanings. Some of the terms are explained here: Strategic Purchasing Definition of material group and supplier strategies, long term Tactical Purchasing Deals with sourcing (identification and selection of suitable suppliers including the contractual arrangement ) Operational Purchasing Operational process of ordering (up to expediting in few cases), short term Sourcing Tactical part of procurement; finding the right sources Buying Operational Procurement Procurement Term used in the UK for the strategic part of buying (sourcing), but in the US for the operational part Purchasing Term used in the US for the strategic part of buying (sourcing), but in the UK for the operational part ISM Winter 2024 14 1.1 Terms and Meanings Some terms and their meanings (2/2) Depending on the author and source used, terms have different meanings. Some of the terms are explained here: Sourcing manager Strategic/tactical purchasing manager Purchaser Unspecific, can be an operational or strategical buyer Contract Commercial agreement with suppliers Specification Description of the article or service to be bought (specification) Commodity group Synonymous use for material group or sourcing group; the term includes tangible goods as well as intangible services e-Procurement Covers all electronic procurement processes (mostly internet-based, but also electronic data interchange) Product Product = good = material = tangible good Service Intangible good ISM Winter 2024 15 1.1 Terms and Meanings The Global Sourcing lecture focus on the tactical and operational procurement processes. Strategy Procurement Vision and Strategy Material Supply Intern Extern Group Chain Analysis Analysis Strategy Management Supplier Procurement- Evaluation & process Tactical and Operational Procurement Process Management Sourcing Order & Negotiation Contract Rfx Expediting Procurement Procurement Procurement Procurement Platform Organisation Performance & Tools/IT Controlling ISM Winter 2024 16 1.1 Terms and Meanings The three core processes in procurement. Definition Commodity Plan to Strategy Strategy Strategic processes* Supplier 1 BU 1 Strategy Strategy Internal Analysis External Analysis BU 2 Supplier 2 Planning Formulation Supplier 3 BU 3 … … Abt. N Supplier n Demand Suppliers Demand Source to Contract Contract Tactical processes Demand Supplier RFx and Supplier Selection Management Research Negotiations Contracting Operational processes Purchase Order (P.O.) Purchase to Pay Payed Invoice Purchase Goods/services Approval payment Order receipt * not part of this lecture ISM Winter 2024 17 1.1 Terms and Meanings Classification of Purchasing Goods (1/2) The purchasing process may concern a large variety of goods and services. In general, purchased materials and services can be grouped into the following categories: 1. Raw materials: Materials which have undergone no transformation or a minimal transformation and which serve as the basis materials for a production process 2. Supplementary materials: Materials that are not absorbed physically in the end product 3. Semi-manufactured products: Products that have already been processed once or more times and that will be processed further at a later stage 4. Components: Manufactured goods that will not undergo additional physical changes, but which will be incorporated in a system with which there is a functional relationship by joining it with other components Source: van Weele (2010) ISM Winter 2024 18 1.1 Terms and Meanings Classification of Purchasing Goods (2/2) 5. Finished products: All products which are purchased to be sold, after negligible added value, either together with other finished products and/or manufactured goods 6. Investment goods or capital equipment: Products that are not consumed immediately, but which purchasing value is depreciated over a period of time 7. Maintenance, repair and operating materials (MRO items): Materials, which are necessary for keeping the organization running in general and for the support activities in particular 8. Services: Labor intensive, non material activities that are executed by third parties on a contract basis Source: van Weele (2010) ISM Winter 2024 19 1.1 Terms and Meanings Example of Non-Product-Related (NPR) Purchasing Goods/Services IT infrastructure Professional Services Office Buildings Office Supplies  MAINFRAMES  FINANCIAL SERVICES  SECURITY SERVICES  STATIONARY  MIDRANGE SYSTEMS  INFORMATION SERVICES  CONSTRUCTION SERVICES  WHITE PAPER  (W)INTEL SERVERS  LEGAL SERVICES  TECHNICAL ISTALLATIONS  COPIER SERVICES  OTHER PROFESSIONAL  MANAGEMENT CONSULTING  INTERIOR CONSTRUCTION  OTHER OFFICE EQUIPMENT  HARDWARE SERVICES  OFFICE FURNITURE  DATABASE SOFTWARE  OTHER PROFESSIONAL SERVICE  CATERING EQUIPMENT  APPLICATION SOFTWARE  HOUSEHOLD/ OFFICE HR  MIDDLEWARE SOFTWARE REMOVALS  BOOKS & MAGAZINES  SECURITY SOFTWARE Marketing and  PARKING SERVICE  CONTRIBUTIONS  PC´s Communication  RENTAL/ LEASE BUILDINGS  TRAINING & TUITION  MONITORS  ENERGY  CLOTHING  COMMERCIAL PRINTED MATTER  PRINTERS  INTERIOR DECORATING  MEDICAL SERVICES  ORGANISATION PRINTED  OTHER PERIPHERALS  STAFF FACILITIES MATTER  OUTSOURCED COUMPUTER Facility Services  TRAVEL  MEDIA/ COMMUNICATION SERVICES  HOTELS & CONFERENCES  PROMOTIONAL ITEMS  WASTE DISPOSAL  TELECOM HARDWARE (VOICE)  REPRESANTATION COSTS  SALES/ PROMOTION EVENTS  FOOD & BEVERAGE MACHINES  TELECOM UTILISATION (DATA)  REQUIREMENT SERVICES  PHOTOGRAPHY SERVICE  CATERING  TELECOM HARDWARE (DATA)  CHILDCARE  TRANSLATION SERVICE  PLANT & FLOWER SERVICES  TELECOM UTILISATION (DATA)  TRANSPORT (STAFF)  MERKET RESEARCH  CLEANING SERVICES  MOBILE TELECOM SERVICES  CARELEASE (PRIVATE)  BUILDING DISPLAYS  FUEL (PRIVATE)  SPONSORSHIP IT Contracting Transport & Logistics  TEMPORARY STAFF  COMPLIANT SUPPLIERS ….  COURIER SERVICES  RESELLERS  STORAGE SERVICES Not relevant  NON-COMPLIANT SUPPLIERS  RAW MATERIALS  PACKAGING  ACHIVING SERVICES  INTERNAL INVOICES VIA A/ P  ….  PACKAGING  UNKNOWN SUPPLIERS  VEHICLES  NON-PROCUREMENT SPEND  FUEL (BUSINESS)  VAT Source: van Weele (2010) ISM Winter 2024 20 1.2 Objectives 01 Principles of Sourcing 1.1 Terms and Meanings 1.2 Objectives 1.3 Outsourcing 1.4 Make-or-Buy ISM Winter 2024 21 1.2 Objectives Procurement Objectives Digitalization Value Contribution of Procurement, Sustainablity, Green Procurement E-Procurement, Integrated Supply Chain Management Procurement Global Sourcing, Objectives Modularization, System Supplier Kanban, JIT, Logistic Internal Procress Optimization Price Optimization Secure of Supply 1950 1960 1970 1980 1990 2000 2010 2020 ISM Winter 2024 22 1.2 Objectives Group Exercise Cost Optimization – Sales Increase ISM Winter 2024 23 1.2 Objectives Company Goal: Additional € 9.8 mil. EBIT (+140%) Which cost reduction in procurement or which sales increase is required to achieve this target? Initial Situation Optimization Revenue: 350 mil. € Profit margin 2% Other cost Profit +140 % Labour cost Reduction of Material cost Material Cost ? (280 mil. €) ? Increase of Sales (full variable cost) ISM Winter 2024 24 Additional Notes for Solution ISM Winter 2024 25 1.2 Objectives Cost Optimization Levers Processes: “Supply chain Savings Optimization" Technical: Make-or-Buy/Outsourcing "Design to cost" Total-Cost-of-Ownership Supply Chain Management Value Analysis Commercial: Standardization "Price reduction" Target Costing Competitive Negotiations Bundling Global Suppliers Capabilities ISM Winter 2024 26 1.2 Objectives Sources of Know-how for Optimizations? Competitive solutions: Using internal Know-How: Benchmarks Function / value Reverse Engineering analyses Manufacturing solutions Innovations Manufacturing technologies Intern Know- Competitive How solutions Systematic Cost Optimization Suppliers Know-How Suppliers Know-How: Innovations Solutions from other projects and industries ISM Winter 2024 27 1.3 Outsourcing 01 Principles of Sourcing 1.1 Terms and Meanings 1.2 Objectives 1.3 Outsourcing 1.4 Supplier Structure ISM Winter 2024 28 1.3 Outsourcing The Increasing Importance of Purchasing and Supply in the Manufacturing Sector 100% Profit 90% 80% Wages, salaries and DISPOSAL OF REVENUE 70% 60% overheads 50% 40% 30% Materials and services 20% 10% 0% 1940 1950 1960 1970 1980 1990 today YEAR Source: Baily et al. et al. (2008) ISM Winter 2024 29 1.3 Outsourcing Vertical Range of Manufacturing in different Industries. median 60% 50% 40% 30% 20% 10% Pharmaceutical Mechanical Metal Automotive Textile and Chemical Engineering Working Industry Industry ISM Winter 2024 30 1.3 Outsourcing Example Automotive Industry: SMART in Hambach (Front and Rear Powertrain) (Plastic Body Pannels) (Painting) (Cockpit) Service Partners (Spaceframe) (Logistics)  Reduced Vertical Range of Manufacturing to 10%  Reduced Vertical Range of Development to 20%  Reduced Production Time to 4h ISM Winter 2024 31 1.3 Outsourcing Topic: Why Outsource? Link: https://www.youtube.com/watch?v=aqhjNJkvC9w Duration: 03:48 minutes ISM Winter 2024 32 1.3 Outsourcing Outsourcing trends According to a survey of 53 major corporations, the most important reasons for outsourcing are: Cost savings 77% Gaining outside expertise 70% Improving services 61% Focusing on core competencies 59% Gaining access to technology 56% Common processes outsourced are: Purchasing Finance/accounting Logistics Customer relations R&D Sales/marketing Operations HR /Training Service management Legal processes Source: Heizer/Render ISM Winter 2024 33 1.3 Outsourcing Different terms referring to Outsourcing. Outtasking BPO* Single tasks Complete processes Outsourcing Outside Resource Using Transfering a Business to an External Company Offshore Nearshore Distant Country Nearby Country * Business Process Outsourcing ISM Winter 2024 34 1.4 Make-or-Buy 01 Principles of Sourcing 1.1 Terms and Meanings 1.2 Objectives 1.3 Outsourcing 1.4 Make-or-Buy ISM Winter 2024 35 1.4 Make-or-Buy Break-even Analysis for Make of Buy Decisions – Total cost line Buy 900 – 800 – Break-even point Total cost line Make 700 – Cost Make = Cost Buy Cost in dollars 600 – 500 – 400 – Variable cost 300 – 200 – 100 – Fixed cost |– | | | | | | | | | | | 0 100 200 300 400 500 600 700 800 900 1000 1100 Volume (units per period) Source: Heizer / Render (2013) ISM Winter 2024 36 1.4 Make-or-Buy Arguments for „Make“ Protection of  Differentiated product characteristics based on a specific know-how production technology  Innovative or unique production technology with differentiation potential or cost advantage Cost  Specialized technology leads to cost advantages Savings  Volume bundling creates competitive advantages  Sometimes lower transport costs  All processes under direct control Quality  Direct managerial authorities Management  Faster improvement cycles  Customer focus Customer  High responsiveness to customer requirements  Close connection to product development Service  Close to sales market Source: Mussbach-Winter, U. (2016), S. 21 ISM Winter 2024 37 1.4 Make-or-Buy Reasons for „Buy" Cost  Use market opportunities by procurement Reduction  Benefit from a large number of specialized suppliers  Building alliances with other companies  Use of various sources to reduce delivery risk Risk Sharing  International orientation balances currency risks  Suppliers have to absorb volume fluctuations Asset  Free cash flow instead of capital investments on business assets  Higher flexibility to develop or switch suppliers Management and so higher flexibility to adapt market trends Availability of  Use through specialized innovation Know-how  Close gaps in know-how next to core competence  Advantage by unique production know-how of the suppliers Source: Mussbach-Winter, U. (2016), S. 22. ISM Winter 2024 38 1.4 Make-or-Buy Group Exercise Make or Buy Decision ISM Winter 2024 39 1.4 Make-or-Buy Situation: A module supplier for cockpits in the truck industry analyses the in-house and external production of a technology component – the dashboard. The dashboard is an essential part of the cockpit. The dashboard was developed by the module supplier itself and, due to the high innovation potential, represents a differentiating feature from the competitors. At the same time, the customer (a truck manufacturer) has contractually agreed high penalties for late delivery and quality problems. Change requests are expected during the term of the contract from the truck manufacturer. The expected demand for next year are 1,200 cockpits. The dashboard is currently produced in-house. There are direct material costs of 250 euros per piece and direct manufacturing costs of 200 euros per piece. In addition, fixed costs of EUR 100,000 per year must be taken into account. On the other hand, you have an offer from a supplier for external supply. The purchase price per dashboard is 500 euros per piece. The supplier grants a discount on the purchase price depending on the purchase quantity. From 1,000 dashboards per year: 15% discount. In addition, transport costs of 50 euros per component must be taken into account. For purchases and warehouses, annual fixed costs of EUR 20,000 per year apply. No capacity expansion is necessary for the product. Tasks: 1. Calculate the BEP. 2. Sketch the graph - cost based on the demand. 3. Calculate the resulting savings for the expected demand. 4. Prepare a make-or-buy recommendation for the management also considering qualitative criteria. ISM Winter 2024 40 Additional Notes for Solution ISM Winter 2024 41 2. Global Sourcing 02 Global Sourcing 2.1 Globalization Trends 2.2 Approach of Companies 2.3 Opportunities and Threats 2.4 Factor Cost Calculation ISM Winter 2024 42 2. Global Sourcing 1. Sketch the development of the world trade and outline the reasons of this development When you 2. Assess the benefits of global sourcing and their complete relevance to specific situations this chapter 3. Explain barriers and risks of global sourcing and you should define corresponding risk reduction measures be able to: 4. Calculate potentials realized by global sourcing based on the factor cost analysis ISM Winter 2024 43 2.1 Globalization Trends 02 Global Sourcing 2.1 Globalization Trends 2.2 Approach of Companies 2.3 Opportunities and Threats 2.4 Factor Cost Calculation ISM Winter 2024 44 2.1 Globalization Trends Global Mega-Trends Corporate Social Responsibility will be of greater importance as organizations face changes Increase of IT and innovations will Acceleration become a key success in consumption patterns with environmental of technological regards to green, social and social factor progress and health responsibility Changes in Demographic change macro Fundamental market Demographic will be highly impact economical changes will be more change availability of and political frequent and access to skilled and also environment raw materials will low cost labor become more critical Shift of economical growth center Demand in traditional industries (and mature markets) will slow down, but developing markets will experience strong growth Source: Arnold (2011) ISM Winter 2024 45 2.1 Globalization Trends Many trade barriers have been constantly falling… Increase in WTO memberships Falling tariffs Number of member countries 166 Percent 159 40 114 CAGR = -5% 90 30 82 25 23 59 15 34 10 6 4 10,000 Gbps per cable 10.000 6,400 ISO 9000 3,200 CAGR = ~100% 1,600 800 1.000 400 200 80 100 40 20 10 $, € 10 95 96 97 98 99 00 01 02 03 04 05 Source: Eurobarometer, WTO ISM Winter 2024 47 2.1 Globalization Trends KOF Globalization Index – Top Globalization countriesis day-to-day business in industrial nations Country Index Dimensions 1. Ireland 91.30 Economic globalization: long distance flow of goods, capital and services as well as information and 2. Netherlands 91.24 perceptions that accompany market exchanges measured by trade flows, FDI and portfolio investments as well as trade restrictions 3. Belgium 91.00 Political globalization: diffusion of government politics measured by embassies and international organizations 4. Austria 90.24 within the country 5. Singapore 87.49 Social globalization: spread of ideas, information, images and people measured by direct interaction of people 6. Sweden 86.59 in different countries (e.g. Telecommunication data), media usage (e.g. internet, TV, newspapers) and international culture within the country (e.g. imported books, movies, availability of international food) 7. Denmark 86.30 27. Germany 78.86 97 97 92 96 95 93 91 91 90 94 91 88 90 91 92 87 92 92 34. USA 76.04 84 83 84 82 84 78 85 71 75. China 75.64 64 59 50 53 Economic globalization Political globalization Social globalization Source: KOF Index of Globalization (ETH Zurich) 2015 ISM Winter 2024 48 2.1 Globalization Trends After a continuous growth Globalization has been declining slightly since 2007. ISM Winter 2024 49 2.1 Globalization Trends Topic: Who benefits most from Global Sourcing. Dr. Thieß Petersen, Samuel George GED, Bertelsmann Stiftung Link: https://www.youtube.com/watch?v=VCDjhc3tWt0 Duration: 04:56 minutes ISM Winter 2024 50 2.2 Approach of Companies 02 Global Sourcing 2.1 Globalization Trends 2.2 Approach of Companies 2.3 Opportunities and Threats 2.4 Factor Cost Calculation ISM Winter 2024 51 2.2 Approach of Companies Global Sourcing Examples: Along with competitors Reebok and Adidas in the athletic shoes industry, Nike contracts out nearly all of its athletic shoe production to foreign suppliers. These firms are best described as brand owners and marketers, not as manufacturers. Apple Computer sources some 70% of its production abroad while focusing its internal resources on improving its operating system and other software platforms. This approach allows Apple to optimally utilize its limited capital resources and focus on its core competences. Dell Inc. is another firm that relies extensively on a global manufacturing network, composed largely of independent suppliers. Source: Cavusgil et al. (2007) ISM Winter 2024 52 2.2 Approach of Companies Sourcing for the Dell Inspiron Notebook Source: Cavusgil et al. (2007), adapted from Freidman (2005) ISM Winter 2024 53 2.2 Approach of Companies Where Boeing Sources the Components for its New 787 Aircraft Source: Cavusgil et al. (2007), adapted from Tatge (2006) ISM Winter 2024 54 2.2 Approach of Companies iPhone’s supply base Source: Inomata, S.( 2013), http://operationsbuzz.com/2010/11/the-iphone-4-supply-chain/ http://haywardeconblog.blogspot.ch/2010/07/i-phone4-and-cost-of-its-component.html Source: Jack M. Willson: Apple – The Global Supply Chain ISM Winter 2024 55 2.2 Approach of Companies Global Sourcing GE Topic: Ben Heineman, Jr. discusses the ethics of global sourcing. Global sourcing is a major initiative across our firm. This video explains some of the ethics issues we deal with on daily basis. Link: https://corporatetube.mediaspace.kaltura.com/media/The+Ethics+of+Gl obal+Sourcing/1_4oaiv0wc#.VYGVIkZnCxY Duration: 02:48 minutes ISM Winter 2024 56 2.2 Approach of Companies Ethics of Global Sourcing When did GE start with global sourcing and what does it mean for GE at this time? Name at least some different (ethical) problems of global sourcing? However, what was GE’s motivation to require this engagement from their sourcing partners (suppliers)? ISM Winter 2024 57 2.3 Opportunities and Threats 02 Global Sourcing 2.1 Globalization Trends 2.2 Approach of Companies 2.3 Opportunities and Threats 2.4 Factor Cost Calculation ISM Winter 2024 58 2.3 Opportunities and Threats Definitions and Reasons for Global Sourcing Definitions Reasons for Global Sourcing Cost/Price benefits International Purchasing: Commercial purchase transaction Presence in Access to between buyer and supplier in foreign technology markets different countries Competition to domestic Quality Global Sourcing: suppliers The business process of identifying, evaluating, negotiating, and Availability configuring supply chains across multiple suppliers and geographies Cost/Price Benefits Lower labor rates and different productivity levels Possible willingness to accept lower profit margin Exchange rate differences Lower-cost materials and inputs Government subsidies Source: Arnold (2011); Monczka et al. (2012) ISM Winter 2024 59 2.3 Opportunities and Threats Typical products China, South East Asia, South Asia and Eastern Europe are typical sourcing markets for many industries Call centres: Textiles: Steel: Philippines China China India Bangladesh (Brazil) Vietnam Consumer electronics: IT services: Machinery: Taiwan India China China Eastern Europe Vietnam ISM Winter 2024 60 2.3 Opportunities and Threats Barriers to Global Sourcing Ignorance of intricacies of global sourcing How to identify potential sources of supply Documentation issues (e.g. LOC, customs) Need for critical assessment, prior Established, routine sourcing to sourcing Lack of patterns skills Look at more than just price Shifting from longstanding Types of risks vary between suppliers different countries Domestic market nationalism Extended material pipelines Daily or hourly fluctuations Forecasting over longer time Need to understand highly Cus- horizons complicated financial options toms & Need to more closely manage How to price purchases culture delivery dates Possibility of transit and/or customs delays More difficult negotiations More difficult interpersonal relationships Source: Monczka et al. (2012) ISM Winter 2024 61 2.3 Opportunities and Threats Risks in Global Sourcing (1/2) 1. Less-than-expected cost savings: Conflicts and misunderstandings arise because of differences in the national and organizational cultures between the focal firm and foreign supplier. Such factors give rise to cost-savings that are less than originally anticipated. 2. Environmental factors: Numerous environmental challenges confront focal firms including: exchange rate fluctuations, labor strikes, adverse macro-economic events, high tariffs and other trade barriers, and high energy and transportation costs. 3. Weak legal environment: Many popular locations for global outsourcing have weak laws and enforcement regarding intellectual property, which can lead to erosion of key strategic assets. Source: Cavusgil et al. (2007) ISM Winter 2024 62 2.3 Opportunities and Threats Risks in Global Sourcing (2/2) 4. Risk of creating competitors: As the focal firm shares its intellectual property and business-process knowledge with foreign suppliers, it also runs the risk of creating future rivals. 5. Inadequate or low-skilled workers: Some foreign suppliers may be staffed by employees who lack appropriate knowledge about the tasks with which they are charged. Other suppliers suffer rapid turnover of skilled employees. 6. Over-reliance on suppliers: Unreliable suppliers may put earlier work aside when they gain a more important client. Suppliers occasionally encounter financial difficulties or are acquired by other firms with different priorities and procedures. Over-reliance can shift control of key activities too much in favor of the supplier. Source: Cavusgil et al. (2007) ISM Winter 2024 63 2.3 Opportunities and Threats Currency risks With markets becoming more volatile, currency risks have to be managed Example Supplier-hedging Finance-hedging Supplier guarantees fixed Hedging through financial Development of foreign currencies price and uses hedging: constructs such as futures or €/PKR (Example € to PKR1)) –Guaranteed minimum options: quantities –No stock keeping –Price increase (risk –No limitation of supplier 150 +35% -22% premium) market –Possibly limited –Additional variable costs 145 competition 140 –High risk in case of supplier problems 135 130 125 120 115 110 105 2020 2021 2022 2022 2023 2024 1) PKR=Pakistani rupees ISM Winter 2024 64 2.4 Factor Cost Calculation 02 Global Sourcing 2.1 Globalization Trends 2.2 Approach of Companies 2.3 Opportunities and Threats 2.4 Factor Cost Calculation ISM Winter 2024 65 2.4 Factor Cost Calculation ISM Winter 2024 66 2.4 Factor Cost Calculation Productivity Comparison Denmark Norway Sweden USA Belgium Netherlands Finland Germany Austria France United Kingdom Canadia Espania Japan Italy Slovenia Greek Lithuania Slovakia Czech Republic Latvia Portugal Hungary Estland Poland 0 20 40 60 80 100 120 140 ISM Winter 2024 67 2.4 Factor Cost Calculation Determination of factor cost index Productivity Factor cost index index Percent 100 Germany = 1 Capital 20 1.0 1.0 80 Labor 1 20 30 0.16** 0,5* 10 Material 50 1.0 1.0 50 Typical Country Index China Purchased Good = potential target costs Germany for Chinese supplier * = Ratio of productivity China and Germany (assumption) ** = Ratio of average cost/manufacturing hour China and Germany (4,3/26) ISM Winter 2024 68 2.4 Factor Cost Calculation Group Exercise Exercise: Determination of factor cost index ISM Winter 2024 69 2.4 Factor Cost Calculation Group Exercise: Determination of factor cost – part 1 Product X`s factor cost allocation is 20% capital, 40% labor, and 40% material. The current price for product X (which is sourced in Germany) is 10 EUR. What is the expected price in the following countries/regions? ** Cost of manu- Country Productivity level* facturing hour (EUR) China (east) 0.75 8 China (west) 0.30 4 Taiwan 0.65 5,5 India 0.55 5 Mexico 0.85 9 *in relation to Germany (=1) a) What can be the saving per piece? b) Assuming a purchasing volume of 45,000 pieces p.a., what can be the annual savings? Do you think this potential saving can justify a Global Sourcing effort? **31 EUR per manufacturing hour in Germany ISM Winter 2024 70 Additional Notes for Solution ISM Winter 2024 71 2.4 Factor Cost Calculation Group Exercise: Determination of factor cost – part 2 Identical situation as in exercise part 1: Cost of manu- Country Productivity level* facturing hour (EUR) China (east) 0.75 8 China (west) 0.30 4 Taiwan 0.65 5,5 India 0.55 5 Mexico 0.85 9 *in relation to Germany (=1) Assuming constant productivity levels, a labor cost increase of 3% p.a. per manufacturing hour in Germany and Mexico, and a yearly labor cost increase of 10% p.a. in India, Taiwan, and China, what is the expected price for product X in 5 years in each country? **31 EUR per manufacturing hour in Germany ISM Winter 2024 72 Additional Notes for Solution ISM Winter 2024 73 3 Sourcing 03 Sourcing 3.1 Sourcing Process 3.2 Specifications 3.3 Supplier Research 3.4 Sourcing Methods ISM Winter 2024 74 3 Sourcing Chapter Outline: Request for Information and Request for Quotation 1. Know how the tendering process works When you 2. Learn the importance and impact of complete specifications this chapter you should 3. Know how to identify suppliers be able to: 4. Use the different sourcing methods in specific situations ISM Winter 2024 75 3.1 Sourcing Process 03 Sourcing 3.1 Sourcing Process 3.2 Specifications 3.3 Supplier Research 3.4 Sourcing Methods ISM Winter 2024 76 3.1 Sourcing Process Sourcing and the supplier selection funnel General information on potential countries to Supply market search information and Request for Request for Supplier Pre- non-qualified Information Quotations Visit Qualifi- supplier contact (RFI) (RFQ) (SCOPE) cation information Technological Audit Commercial and General Fit Screening Attractiveness Organizational Country Fit Check  Check potential  Attractive supply  Headcount  Price ∆ to  Technical  Official countries and market  Turnover/Head current price capability release their  Supplier long list  Equipment  Feasibility of  Organizational attractiveness (no relationship,  Customer reference part aptitude  Best country no Western references manufacturing sourcing subsidiary)  Certification ISM Winter 2024 77 3.1 Sourcing Process Tender objectives match to procurement goals. To generate new options & Leveraging costs possibilities Reduction of compliance costs Development of new products & Reduction of material costs markets Reduction of energy costs Development of new working Effect: Reduction of TCO functions & techniques Bonding new innovative Aim of tendering: relationships sustain results in procurement Proactive Management strategic, social & environmental chances & risks in the Supply Chain to generate Support & benefit by Reducing risk sustainable competitive Stakeholders Avoidance of reputation risk advantages Increase supplier relationship Securing protection of Strengthening of the brand trademarks Increase the attractiveness for Elimination of disruption in the potential investors Supply Chain Improvement of the reputation ISM Winter 2024 78 3.1 Sourcing Process The sourcing process is essential to realize successful procurement. Preparation Negotiation Contract Implementation Pre-Request Tender Define objective of the Building/creating the Plausibility check To close contract Create a plan of tender design of tender Compare offers terms/conditions implementations (time/ Data acquisition Supplier motivation for Design assignment Define Service Level responsibilities) (quantity, demand) interest setting Agreement (SLA) To accompany the first Outline specifications Check tender & Evaluate alternatives Establish Supplier- delivery Research on alternatives Renegotiations Scorecard Successive change of procurement market Create final version of supplier & services tender & specifications Controlling Re-tendering Factor of success Factor of success Factor of success Factor of success Factor of success Define K.O. criteria Create cost Prior planning of Make decisions in the Strategy adjustment Positive self-expression transparency to open negotiation targets team (transparent) intern/extern Intelligent definition of room for creativity Several negotiations in Inform special Routinely Follow-up specification & demand Develop potential for a row department about made Meetings improvement Train roleplaying decisions Lessons learned Short deadlines, close contact ISM Winter 2024 79 3.1 Sourcing Process Depending on it´s complexity, tendering can take six to twelve weeks Maßnahmen Week 18 19 20 21 … … 29 30 1 Preparation Success factors Research Volume bundling Intake of specification/process Interdisciplinary project work Building/creating tender offers (procurement, technique, Logistic) 2 Support by CPO/ Management Board Tendering Optimization in 3 dimensions: Implementation of tendering - Price (cost savings) Evaluation of offers - Quality - Security of supply 3 Assignment Preparations for negotiations Supplier discussions (takes possibly a couple of rounds) Models, tests, audits, releases,… Coordination in Team Contract negotiations Important: interdisciplinary Decision taking teamwork including 4 openness, transparency and Documentation clear agreements Formulate conditions Preparation Implementations Reviews with CPO/Management) ISM Winter 2024 80 3.1 Sourcing Process Group Exercise Sourcing process ISM Winter 2024 81 3.1 Sourcing Process Sourcing process for a bank Situation: A national bank in Germany with 2.500 employees and 80 locations across the country prepares a tender for cleaning services. Tasks: Sketch the sourcing process to prepare a successful supplier selection. Name the activities and essential milestones in each phase of the process. ISM Winter 2024 82 3.2 Specifications 03 Sourcing 3.1 Sourcing Process 3.2 Specifications 3.3 Supplier Research 3.4 Sourcing Methods ISM Winter 2024 83 3.2 Specifications Creating transparency is the prerequisite for an effective sourcing process. Asking the right questions to the right people is key Who requires What quantity When (time & period) What costs What (material) Which specifications Where (at what place) Usually, information must be gathered form several different sources. Typically, beside Procurement, Legal, Accounting and Production Department can provide most of the required information ISM Winter 2024 84 3.2 Specifications Defining the real business requirements are the basis for defining and executing the sourcing process correctly What would we like to have? What do you actually need? Identifying the difference between needs and wants is not always easy, but worth the effort. ISM Winter 2024 85 3.2 Specifications Problems in Specification development Consumer Requestor (creates Purchaser Supplier specification) flow of information requestor purchase product/ service delivery process Supervisor, project = Interface problems Employee in special manager, external departments advisor or engineer ISM Winter 2024 86 3.2 Specifications Challenges in specification development What users really need What users describe What experts understand What suppliers propose What suppliers What experts describe understand Redefinition of quality levels provides savings opportunities ISM Winter 2024 87 3.2 Specifications The Specification: Definition, Function, and Challenges A specification describes the “agreed condition” which the seller has to ensure. Thus a specification is part of the contract. A deviation from the specification represents a material defect and leads to a warranty claim. It’s like a bundle of characteristics, which the supplier has to fulfill. An ideal specification should … … be designed simply … be accepted widely on the market … be produced supplier neutral to offer equal opportunities In many business situations there is a clear demander, e.g. an technical employee, and a user, e.g. a production employee. The objective of a specification is that a problem can be solved by an external purchase of a good or a service. For a good or services which is purchased for the first time, the development of a specification can be very difficult. Often it isn’t very clear which characteristics a good or a service should fulfill. Tips and tricks  An effective procedure to develop a specification is the collection of offers or direct talks to suppliers.  In many cases the total scope of a specification is only clear after a conversation about the actual market situation.  Even in the final specification, there should be the chance to ask alternative suppliers. Source: Büsch (2013) ISM Winter 2024 88 3.2 Specifications How to define the requirements (specification) Topic: Requirements gathering - funny. Link: https://www.youtube.com/watch?v=BKorP55Aqvg Duration: 07:34 minutes ISM Winter 2024 89 3.3 Supplier Research 03 Sourcing 3.1 Sourcing Process 3.2 Specifications 3.3 Supplier Research 3.4 Sourcing Methods ISM Winter 2024 90 3.3 Supplier Research Supply market analysis as a first step Distinction between different Relevant information Procedure procurement markets National/ European/ global General industry & country Research: Monopolistic/ oligopolistic/ information Internet polypolistic Relationship between supply and Magazines/ trade press Structured/ non structured demand (especially relevant on raw Organisations/ chambers Regulated/ liberalized material markets) Data bases Company (group)/ mid tier Capacities … Manufacture/ distributor Export restriction Interviews: … Substitute products Know-how-carrier in own … company (QM,…) Selected supplier … Aim of the research on sourcing market: Understanding the “playing rules“ of the pertinent sourcing market, to adjust the sourcing strategy in a target-orientated way ISM Winter 2024 91 3.3 Supplier Research Potential Sources of Data Publicly accessible Personal contacts Data published by a company Patents (license) Current suppliers Business information Financial data Trade register Favorite suppliers Ad-hoc-notifications Stock prices Trade and industry Sales representative Press releases Balance sheet associations Internal sources Product catalogue KPIs Industry services (production, logistics, Company websites Analyst reports Test reports marketing etc.) Advertisements Annual reports Internet … commercial … General and industry Annual reports press … Purchasing aid Credit insurances Studies References of suppliers … Source: Büsch (2013); Monczka et al. (2012) ISM Winter 2024 92 3.3 Supplier Research Additional websites for supply market information  International Federation of Purchasing and Supply Management: http://www.ifpmm.org/  Forrester Research: http://www.forrester.com/  World Bank: http://www.worldbank.org/  International Chamber of Commerce: http://www.iccwbo.org/  Organization for Economic Co-operation and Development: http://www.oecd.org/  Euromonitor: http://www.euromonitor.com  Thomas Register: http://www.thomasnet.com/  Dun & Bradstreet: http://www.dnb.com/us/  Standard & Poor’s: http://www.standardandpoors.com ISM Winter 2024 93 3.3 Supplier Research Further potential sources for supply market information  Build own database over time  Chambers of commerce  Associations (international federation of purchasing and materials management, BME in Germany,…)  Trade shows & Trade journals  Trading companies / Agencies  Third-party support (consultants)  Trade consulates/embassies  Purchasing professionals of other companies (not competitors)  Current suppliers  Industry reports from banks and financial institutions ISM Winter 2024 94 3.3 Supplier Research Supplier Scouting Topic: Scoutbee solution. Link: https://www.youtube.com/watch?v=hd8rYPW_Nhg Duration: 04:35 minutes ISM Winter 2024 95 3.3 Supplier Research Supplier self-assessment/questionnaire as first step for data acquisition. Supplier questionnaire (1/4) Supplier questionnaire( (2/4) Supplier questionnaire( (3/4) Supplier questionnaire( (4/4) LIEFERANTENFRAGEBOGEN Flexibles Produktionsstätte 1 General data Name: Addresse Kontakt QM-System Telefon EC Registrierungsnr. Warehousing/ Anzahl Schichten /Arbeitszeit Durschnittliche Auslastung Logistics Extrusion Maschinenpark Typ 1 PlantTyp 2 Typ 3 Typ 4 T Hersteller Typ Baujahr Coextrusion / Schichten Folienmaterialien Output p.a. [m²] Kurzbeschreibung Tiefdruckmaschinen Maschinenpark Typ 1 Typ 2 Typ 3 Typ 4 T Hersteller Typ Baujahr Druckbreite Druckeinheiten Output p.a. [m²] Kurzbeschreibung Laminieranlage Maschinenpark Typ 1 Typ 2 Typ 3 Typ 4 T Hersteller Typ Baujahr Verarbeitungsbreite Schichten Output p.a. [m²] Kurzbeschreibung Wickel-/Schneideanlage Maschinenpark Typ 1 Typ 2 Typ 3 Typ 4 T Hersteller Typ Baujahr Max. Wickel- durchmesser [mm] Schlitzbreite Output p.a. [m²] ISM Winter 2024 96 Kurzbeschreibung 3.3 Supplier Research Facts about the new potential supplier Business area: Steel construction and zinc processing Enterprise conception: Steel producer with nine subsidiaries Foundation: 1957 Privatization in 2005 Employees: 225 -85 Steel worker -65 Zinc worker -75 Administration and temp’s Turnover in 2009: 14 M€ Manufacturing capacity of steel p.a.: 14 tons ID-number: ISO 9001:2000 ISO 14001:2004 Modern plant ISM Winter 2024 97 3.4 Sourcing Methods 03 Sourcing 3.1 Sourcing Process 3.2 Specifications 3.3 Supplier Research 3.4 Sourcing Methods ISM Winter 2024 98 3.4 Sourcing Methods Aim of the Sourcing Methods is the selection of the “best” supplier considering the specific situation. Sourcing Methods Direct Idea- and Tender, Auctions Nomination Concept Contest RFP/RFQ ISM Winter 2024 99 3.4 Sourcing Methods There are two main aspects for a direct nomination. Direct Nomination Direct Purchase Prioritized Supplier C-products or services in combination Monopolistic Supplier with distinct specification Supplier offers optimum: Direct purchase from already known Best Performance in combination supplier or researched supplier with best prize Early supplier involvement for unclear specifications ISM Winter 2024 100 3.4 DerSourcing Methods Konzeptwettbewerb nutzt die Innovationskapazitäten Concept der Lieferanten. Contest focus on the innovations and know-how on the supply markets. Sourcing Process Concept Contest Approach: Concept Contest  Almost wordwide Sourcing by rough specifications  Concept proposals by prospective suppliers  Concept decision and supplier nomination  Detailling specifications  Often livecycle contract ISM Winter 2024 101 3.4 Sourcing Methods Example: Concept Contest in the automotive industry System proposal List of strategic developers 1 2 Supplier selection 3 3 Start of concept contest Kick off meeting 5 Concept presentations and follow up process 10 9 6 List of operational developers Concept evaluation 8 7 Supplier nomination Supplier recommendation ISM Winter 2024 102 3.4 Sourcing Methods A tender often called Request for Proposal or Request for Quotation is the most frequently used method in purchasing. Preconditions Objectives  Clear specification of the demand.  Balanced optimum between number of suppliers and effort for evaluation  Information about prospective of offers and supplier selection suppliers  Create high competition between suppliers  Identify the best supplier for the specific demand ISM Winter 2024 103 3.4 Sourcing Methods Tendering Process RFP/RFQ Definition RFP/RFQ RFP/RFQ analysis and RFP/RFQ criteria preparation sent out assessment Commercial criteria – Content: Sent our RFP Development of volumes, prices, Tender objectives documents evaluation qualities, warranties, methodology Company presentation Communication with maintenance, suppliers (Questions/ Analysis and evaluation financial stability of Technical information answers) of results supplier, etc. Time plan and Receipt RFP Best Case savings Technical criteria – responsibilities documents calculation specifications, Guidelines for Assessment and scoring drawings, etc. communication of non-monetary Price grid for offers criteria Template to gather RFP = Request for proposal RFQ = Request for quotation supplier information (Revenues, volumes, Source: HÖVELER HOLZMANN CONSULTING (2013) references, etc.) ISM Winter 2024 104 3.4 Sourcing Methods General elements of a RFQ Section 1: Section 2: Section 3: Section 4: Introduction Structure Volume Specification Subject of the tender Schedule of the tender (Annual) volume of the Detailed specifications Background & aims of Principle: offer free of tender and volume of all articles of the the tender/Sourcing charge fluctuations p.a. tender (dimensions, Company presentation Deadline for the tender Planed volume per tolerance, colour, etc.) … and validity article Time plan Binding volume Selection criteria (commitment period) … … Section 5: Section 6: Section 7: Section 8: Logistic & Delivery Payment Condition Contractual Terms Price Sheet Place of delivery Invoice General terms Production of offering (location, plant, etc.) Terms of payment Contractual period documents Planning process Cash discount Responsibilities Volume discount Volume of production Rebates Certificates Other discounts Supply volume … Ban of use of sub- Granted market Packaging contractors conditions specification … … … ISM Winter 2024 105 3.4 Sourcing Methods eAuctions or Reverce Auctions focus on the competition on the supply markets. ISM Winter 2024 106 3.4 Sourcing Methods Reverse Auction Topic: What is a reverse auction? Link: https://www.youtube.com/watch?v=vdqPHgGKgjU Duration: 01:08 minutes ISM Winter 2024 107 3.4 Sourcing Methods English Auction/Reverse Auction Dutch Auction Participants bid against one another, with each In the traditional Dutch auction the auction begins subsequent bid required to be higher than the with a high price; the price is lowered until a previous bid. Bids are submitted electronically participant is willing to accept the sellers price or with the highest current bid publicly displayed. until the sellers reserve price is met. The auction ends when no participant is willing to The Dutch auction is named for its best known bid further, at which point the highest bidder gets example, the Dutch tulip auctions. the contract. In Purchasing a Reverse Auction is In Purchasing the auction begin with a low price used, where the lowest bidder gets the contract. and the price is highered until a seller accepts the price. Sealed first-price auction Vickrey Auction - blind auction - In this type of auction all bidders simultaneously This is identical to the sealed first-price auction submit sealed bids so that no bidder knows the except that the winning bidder pays the second- bid of any other participant. The best bidder gets highest bid rather than his or her own. Vickrey the contract to the price they submitted. auctions are extremely important in auction This type of auction is distinct from the English theory, and commonly used in automated contexts auction, in that bidders can only submit one bid such as real-time bidding for online advertising, each. Furthermore, as bidders cannot see the bids but rarely in non-automated contexts. of other participants they cannot adjust their own This kind of auction is not relevant in purchasing. bids accordingly. ISM Winter 2024 108 3.4 Sourcing Methods The set-up of the auction is crucial for the success. Selection of Demand specification Auction Auction materials and supplier Phase or services prearrangement execution selection Analysis of Formulation of Configuration of Auction start materials and clear auction parameters Supplier bids services specifications Supplier contracts Hot-line-service Analysis of the Supplier research, for auction Task supply market RFI Analysis of auction Establish hotline- process Project plan Supplier selection service End of auction System tests Supplier nomination Result - Prioritized supply - Specification Set-up for auction Contract - Time schedule - Supplier short list ISM Winter 2024 109  Wert in DM G