Chapter 4 strategic sourcing

• Understand the strategic role played by the purchasing function in developing & improving the supply chain... CHAPTER OUTLINE• Introduction • Ethical and Sustainable Sourcing • Devel

Strategic

Sourcing for

Successful SCM

Chapter 4

LEARNING OBJECTIVES

You should be able to –

• Describe the difference between purchasing and

strategic sourcing

• Describe how strategic sourcing plans are developed and

implemented

• Define and describe the terms green sourcing, VMI, JIT

II, in-sourcing, co-sourcing, and co-managed inventories

• Describe sourcing’s role in managing key supplier

relationships

LEARNING OBJECTIVES

(Continued)

You should be able to –

• Describe the performance criteria used in assessing

suppliers

• Describe how strategic supplier relationships can impact

the firm

• Describe how a reverse auction/tendering works.

• Understand the importance of sharing the benefits of

strategic partnerships

• Understand the strategic role played by the purchasing

function in developing & improving the supply chain

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CHAPTER OUTLINE

• Introduction

• Ethical and Sustainable Sourcing

• Developing Ethical and Sustainable Sourcing Strategies

• Supply Base Rationalization Programs

• Ethical and Sustainable Supplier Certification Programs

• Outsourcing Products & Services

• Early Supplier Involvement

• Strategic Alliance Development

CHAPTER OUTLINE (Continued)

• Use of e-Procurement Systems

• Rewarding Supplier Performance

• Benchmarking Successful Sourcing Practices

• Using Third-Party Supply Chain Management Services

• Assessing & Improving the Firm’s Sourcing Function

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Sourcing - all of firm’s activities used to manage

external resources

Strategic sourcing - managing the firm’s external

resources to support firm’s long term goals

Drivers/ Key aims of Strategic Sourcing

 Reduce costs & delivery cycle times

 Improve quality & long-term financial performance

 Focus on ethical and sustainable sourcing

Why need focus on ethics, sustainability or enviroment?

• Read article on page 102 and give conclusion

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Ethical and Sustainable Sourcing Strategies

 Business Ethics is the application of ethical

principles to business

 Corporate Social Responsibility(CSR) is the

practice of business ethics

 Ethical Sourcing is that which attempts to take into account the public consequences of organizational

buying or bring about positive social change through

organizational buying behavior

Ethical and Sustainable Sourcing Strategies

(Continued)

Ethical Policies should include –

 Determining where all purchased goods originated

and the manner in which they were made

 Knowledge of the suppliers’ workplace principles

 Inclusion of ethics as a performance rating

 Independent verification of vendor/seller compliance

 Report of supplier compliance to stakeholders

 Provision of detailed ethical sourcing expectations to

suppliers

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Ethical and Sustainable Sourcing Strategies

(Continued)

Sustainable Sourcing

 Green purchasing is aimed at ensuring products or

materials meet environmental objectives e.g waste

reduction, reuse and recycling

 Sustainability is the ability to meet current needs of

the supply chain without hindering/limit the ability to

meet future needs in terms of economic,

environmental, and social challenges

 Considers worker safety, wages, working conditions, human rights

Ethical and Sustainable Sourcing Strategies

 Link brand to social consciousness of consumer

 Build intangible assets

 Build social and environmental responsibility

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Framework for ethical and sustainable

sourcing strategy development

6 STEPS

Ethical and Sustainable Sourcing Strategies

(Continued)

Ethical and Sustainable Sourcing Strategies

(Continued)

Ethical and Sustainable Framework

Step 1:

Establish policies

Step 2: Train and implement

Step 3:

Prioritize opportunities

Step 4: Develop

performance measurement systems

Step 5: Monitor progress and make improvements

Step 6: Expand focus to other departments

Step 1 – Establish corporate ethical and sustainable

sourcing policies

• Verifies top management support, establish a

vision and direction

• Enforce the importance of ethical and

sustainable sourcing and reduce confusion

Step 2 – Train purchasing staff and implement policies

• Ensure that buyers are skilled in environmental

and social consideration in sourcing

• Ensure user and suppliers understand why and

how purchasing decision are made

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Step 3 – Prioritize items based on ethical and sustainability

opportunities and ease of implementation

• Allow buyer to “pick low hanging fruit ” to

provide evidence for successful strategy

implementation

Step 4 – Develop performance measurement system

• Measurement provide accountability and a way

to improve over time

• Should be reviewed periodically

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Step 5 – Monitor progress and make improvements Increase use of green and fair trade

products

• Use performance measures to identify

weakness

• Step up efforts to develop better capability in a

firms and its supply base

Step 6 – Expand focus to include other departments

• Use the purchasing department’s success and

influence to grow awareness in the firm and

Supply Base Rationalization Programs

Supply base rationalization ( supply base

reduction or supply base optimization ) is often the initial supply chain management effort

Buyer-supplier partnerships are easier with a

rationalized supply base & result in –

 Reduced purchase prices

 Fewer supplier management problems

 Closer & more frequent interaction between buyer &

Strategic Alliance &

Supplier Certification Programs

Supplier certification programs are used to

identify strategic supplier alliance candidates

Firms use in-house formal certification programs,

& most require ISO 9000 / 14000 or similar

certifications as part of the certification process

The use of ethical & environmental certification

is increasing

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Outsourcing Products and Services

Outsourcing allows a firm to –

 Concentrate on core capabilities

 Reduce staffing levels

 Accelerate reengineering efforts

 Reduce management problems

 Improve manufacturing flexibility

Risks associated with outsourcing, include –

 Loss of control

 Increased reliance on suppliers

Early Supplier Involvement

Early supplier involvement (ESI) highly effective supply chain integrative techniques

- Key suppliers become more involved in the internal

operations of the firm, particularly with respect to

new product & process design, concurrent

engineering & design for manufacturability

techniques

These above activities are called value

engineering which help the firm to reduce cost,

improve quality & reduce new product development time

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Vendor managed inventory (VMI) –

Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer

From the buyer-firm’s perspective –

 Supplier tracks inventories

 Determines delivery schedules and order quantities

 Buyer can take ownership at stocking location

From the supplier’s perspective –

 Avoids ill-advised customer orders

 Supplier decides inventory set up & shipments

Early Supplier Involvement (Continued)

Strategic Alliance Development

Alliance development , an extension of supplier development refers to increasing a key or

strategic supplier’s capabilities.

Supplier alliances result in better market

penetration access to new technologies &

knowledge, & higher return on investment

Alliance development eventually extends to a

firm’s second-tier suppliers, as the firm’s key

suppliers begin to form their own alliances

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Negotiating Win-Win Strategic Alliance

Agreements Collaborative negotiations (integrative

negotiations) –

Both sides work together to maximize the outcome

or create a win-win result

 Requires open discussions and a free-flow of information between parties

Distributive negotiations –

Refers to a process that leads to self-interested, one-sided outcome

Negotiating Win-Win Strategic Alliance

Agreements (Continued)

1 Build preparation

process

Gain an understanding of both parties’ interests;

brainstorm value-maximizing solutions; identify objective criteria to evaluate fairness of agreement.

Use of e-Procurement Systems

Primary benefits of e-procurement include –

 Cost savings

 Frees-up time to concentrate on core business

e-procurement systems –

Concentrate large volumes of small purchases with

a few suppliers, using e- catalogues, available to the organization’s users

Reverse auctions –

Pre-qualified suppliers enter Web site & at designated time & date, try to underbid competitors,

pre-Rewarding Supplier Performance

performance goals

resulting from a late delivery or poor quality

Strategic supplier agreements can reward

suppliers by allowing –

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Benchmarking Successful Sourcing Practices

Benchmarking –

Measuring what other businesses do best and

matching their performance is an effective approach to improving supply chain performance Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal & informal

Resources for learning about & implementing sourcing practices –

 The Center for Advanced Purchasing Studies

 Supply-Chain Council

Using Third-Party Supply Chain Management Services

Third-party logistics (3PL)

A growing industry that involves managing a firm’s sourcing or materials &/or product distribution responsibilities

savings of 10 to 20% of total logistics costs; benefits include improved service, quality, & profits for their clients.

Vendor-managed inventory (VMI) services –

One of the more popular roles of 3PL

Lead logistics provider (LLP), aka 4PL –

A primary 3PL provider; one that oversees other 3PL’s

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Assessing & Improving the Firm’s Purchasing Function

The purchasing function is one of the most

value-enhancing functions in any organization

 It is preferable to periodically monitor the purchasing function’s performance against set standards, goals, and/or industry benchmarks

 Surveys or audits can be administered as

self-assessments among purchasing staff as part of the annual evaluation process

Assessing & Improving Firm’s Purchasing

Skill set requirements of purchasing professionals

have been changing Purchasing personnel must today exhibit world-class skills such as –

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Assessing & Improving Firm’s Purchasing

Function (Continued)

1 Participating in and

leading multifunctional teams

2 Participate in value

engineering efforts

3 Optimize supply base

4 Create ESI initiatives