Lecture supply chain management chapter 3 sourcing and procurement

Trang 1 LOGOCHAPTER 3: SOURCING AND PROCUREMENT Trang 2 LOGOCourse book and support materialsvAlanHarrisonandet.2014,Logisticsmanagement and strategy competing through thesupply chain f

CHAPTER 3: SOURCING AND PROCUREMENT

MsC Bui Thi Bich Lien

Course book and support materials

management and strategy competing through the

supply chain (fifth edition), Pearson, (course book)

chapter 9-pp.353-387

v Arnold J.R Tony et al (2008), Introduction to

materials management (sixth edition), Pearson,

chapter 7, pp.191-215

v Michael Hugos (2003), Essentials of Supply Chain

Management, John Wiley and Sons Inc chapter 2:

vUse the procurement core-processes

vApproach the management of the supply

base

vSource: Douglas M Lambert et al (2001):

Strategic logistics management McGraw-Hill

1 Definition vPurchasing: is the function of procuring

managing supplier relationships, and

ensuring high levels of performance to

Channel Postponement

Detailed Purchasing Responsibilities

vProvide an uninterrupted flow of materials

and services

vPurchasing products competitively

vKeeping inventory investment to a minimum

vProviding consistent, quality purchased

materials and services

vDeveloping the supplier base

vDeveloping people resources and

information tools for productivity optimization

LOGOPurchasing objectives

Some basic functions:

quality, right quantity, and right delivery (time and

place).

- Selecting supplier (right source)

- Negotiating terms and conditions of purchase (right

price)

- Issuing and administration of purchase orders.

Definition of sourcing

vThe body of integrated activities that

focuses on the purchase of materials,

supplies, and services needed to reach

the firm’s strategic goals In a narrow

sense, sourcing describes the process of

buying, in a broader context, sourcing

involves determining the need, selecting

the supplier, arriving at the appropriate

price, terms, and conditions, drafting the

contract, and growing mutually beneficial

supplier relationships

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Definition of procurement

vProcurement is the process of getting the

goods and/or services your company

needs to fulfill its business model Some of

the tasks involved in procurement include

developing standards of quality, financing

goods, inventory control and disposal of

waste products like packaging.

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2 Sourcing

Sourcing strategy in Supply chain

The role and the importance of sourcing

Viewpoints and development process of SM

Sourcing Strategy

Basic factors to determine sourcing strategy

Outsourcing in Supply chain

Definition, advantages and risks

Basic factors to make outsource decision

Partner choice process

Logistics service outsource

Strategic Sourcing

vA comprehensive approach for locating

and sourcing key material suppliers, which

often includes the business process of

analyzing total spend for material spend

categories There is a focus on the

development of long-term relationships

with trading partners who can help the

purchaser meet profitability and customer

satisfaction goals.

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Strategic sourcing Objectives

v Establish close, collaborative relationships with

key suppliers

v Ensure reliable quality and delivery of materials

v Reduce supply risks

responsive supplier base

development and innovation

v Reduce external spending

v Reduce transaction costs

Why sourcing is very important?

Suitable cost cutting centre

Ensuring smooth and continuous production

line and business

Intra-corporate interaction center

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Why sourcing is very important?

Industries Percent of material cost in cost of good

sold

Average

Petrochemical industryTransport

Car manufactureWood industryFood processingPaper industryElectronic equipment

PC, Electronic device

• Meet the highestrequirement ofcustomers with thelowest cost

• Relationship Building

• Lowest Total Cost

• Lowest Unit costDEVELOPMENT PROCESS OF SOURCING MANAGEMENT

Deploy and controlEasy to change suppliersSupport from IT

Procurement (Tactical)

• Conduct in-depth researches

• Material searching and having substitute plan

• Finding the lowest total cost:

• Procurement, inventory, transport cost

• Choosing, negotiating with suppliers

• Ensuring the continuous, regular sources

• Building the relationship with suppliersDEVELOPMENT PROCESS OF SOURCING MANAGEMENT

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DEVELOPMENT PROCESS OF SOURCING MANAGEMENT

Supply Chain Management

Multiple suppliers strategy

Create competitive pressure on

among suppliers

Some strategies in sourcing

Few suppliers strategy

Long-term partners relationship development

to meet the requirements of end users

Customers – Suppliers Alliance strategy (Keiretsu)

Suppliers become an integrated part of the

- Many sources for a product

- Competitive environment, low

price, good service, low risk

- Focus on price, short-term benefit

- Opposition relations, less open

- Variety of product

- Delivery at the warehouse

- Single transaction

Sourcing strategy

Few suppliers strategy

- Some sources for a product

- Collaboration, long term and

stable relationship.

- Economies of scale

- Selective supply contracts

- Just in time (regular delivery)

- Small lot for each deliver

- Controlling the material at the

supplier’s sites

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Sourcing strategy

Customers – Suppliers Alliance strategy (Keiretsu)

- Exclusive supply contract

- Same objectives and must be

identified clearly

- System integration

- Dependent and adaptive

- Investment and benefit sharing

- Discuss and interact regularly

Supplier plays a important role in the success of the

company, takes part in from the first stage (design the

products)

Sourcing strategy

Number of Suppliers and the relationship level

Transactional

relationship

Operational relationship

Tactical relationship Strategic Alliances

Multiple suppliers Selective suppliers Few Suppliers One Supplier

ü Open communication

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Sourcing strategy

Selecting suppliers

Potential

suppliers

list

Request for quotation

Detail evaluating

Site visit

Supply contract

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RELATIONSHIP DEVELOPMENT WITH SUPPLIERS

In order to manufacture famous brand all over the world,

you need have an idea, unique design, qualitative

specifications However, above all you must have good

Increase value and facilitate for the manufacturing process

Company success

Suppliers structure

Suppliers – customers relationship

Interactive and sustainable relationship

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RELATIONSHIP DEVELOPMENT WITH SUPPLIERS

LOGOFactors to determine sourcing strategy

Risk level of buying decision

Power and attitude of suppliers

Procurement division capability

Ability to maintain a stable supply without increasing risk

KRALJIC Matrix

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Factors to determine sourcing strategy

Classify the materials

• Penetration barriers

Non-critical Items Bottleneck Items

ü Low risk, high value

ü Low risk, high value

ü Availability and easy

Factors to determine sourcing strategy

Factors to determine sourcing strategy

ü Using multiple suppliers

ü Exploit the call option

ü Identify the scale and optimized price

ü Local Suppliers

ü Surf the price

ü Simple and automatic process

ü Risk prevention plan

ü Supplier’s reliability

ü Cooperation relationship

ü Accepting high price if needed

Factors to determine sourcing strategy

Multiple Suppliers Few Suppliers

- Many sources for a product

- Competitive environment, low

price, good service, low risk

- Price focus, short-term benefit

- Opposite relationship, less open.

- Variety products

- Delivered at warehouse

- One or few sources for a product

- Cooperation relationship, stable, long – terms

- Take the advantage of economies of scale.

- Selective sourcing contract

- Regular delivery

- Small shipment for one delivery

- Delivered at the place which uses material

- The characteristics of sourcing market

- The capability of suppliers

- Procurement and sourcing opinions ofenterprises

Pricing Negotiation and contract

3 Sourcing process Steps

Design Collaborati -on

Supplier Relationship Management (SRM)

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Step 1: Make or Buy decision

Step 1: Spend Analysis

v What products and services did the organization

purchase during the previous year?

v Which products and services are strategic and which

are tactical buys?

service delivery and quality?

v Which suppliers received the majority of the firm’s

spend

standardization, and leveraging market conditions?

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Establishing Specifications

v Quantity requirements (khối lượng)

• Economies of scale => better price

v Price requirements

• Economic value that the buyer puts on the item (low price item => not high price for

a component part)

v Functional requirements (chất lượng, tính năng, ) Vd: hàng may mặc: màu

săc, loại vải, thiết kế, sự tiện lợi,

• Functional specification and quality (sources of specifications: buyer

specifications or standard specifications eg TCVN )

• By brand

• By specification of physical and chemical characteristics, material and method of

manufacture and performance (a water pump might be specified as having to deliver

so many gallons per minute )

• By engineering drawing (information on such things as finishes, tolerances, and

material to be used,

• Samples (eg Color, shape) and etc

• Value analysis

• The systematic use of techniques that identify a required function, establish a value for

that function, and finally provide that function at the lowest overall cost.

• Evolution of the milk bottle from a heavy glass top lastic jug => cheaper package,

transport, breakage

Supplier Sourcing

Compatibility of interests Mutual need Openness

Lower value – added relationships Higher value – added relationship

Tactical relationships Collaborative relationships

Vendors Traditional

Suppliers

Certified suppliers

Partnership – type relationships

Strategic Alliances

Good suppliers

Traditional suppliers

Satisfactory supplier

Unsatisfactory

supplier

Focus on product, short-term

Focus on product, and service

Focus on process and system

Continuous innovation and adjust

Increase cost due

to bad quality,

fluctuating price,

ü Overseas trade representatives

üEtc (can you list others?)

Step 2: Supplier Scoring and Assessment

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Step 2: Supplier Scoring and Assessment

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Scoring Suppliers

v Ranking method: quantify those things that are not

quantified by nature

vStep 1: Select those factors that must be considered in

evaluating potential suppliers

vStep 2: Assign a weight to each factor (the importance of the

factor in relation to the other factors), usually a scale of 1 to 10

vStep 3: Rate the suppliers for each factor (supplier’s ability to

meet the requirements of each factor) Usually a scale of 1 to

10

vStep 4: Rank the suppliers (ranking value=weight *rate)

vStep 5: Total ranking and select (decision rule: select the

supplier with highest total ranking)

Example

A B C D A B C D Function 10 8 10 6 6

Competitive value Suppliers

• Meets technical and quality requirements and are authorized suppliers of products and service

Preferred

Approved

Certified

Qualified

• Meets certain criteria and levels

of performance that enable them

to be considered as possible suppliers

• Meets criteria for superior product, pricing, service, and delivery and are especially valuable to the purchasing org.

Disqualified

• Meets disqualification criteria because of contract violations, chronic underperformance, or lack of quality

Cost Analysis

Total cost Analysis

Example

v The buyer at ABC wants to perform a break-even

analysis on an item with a known supplier The

supplier’s fixed overhead costs are USD 3000, and

the variable costs per unit are USD 6, to produce a

lot of 900 units The purchase price is USD 10 per

unit.

§ What is the total cost to the supplier?

§ What is the unit cost to the supplier?

§ What is the break – even quantity?

§ What is the break – even revenue?

§ What is the supplier’s expected profit?

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Negotiation Objectives

NEGOTIATION OBJECTIVES

Service Levels

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Negotiation Outcomes

Negotiations

Essential skills and qualities include:

§ Questioning and listening

First example of negotiation

How to divide the orange into 2 same parts?

www.designfreebies.org

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Ngôn ngữ cơ thể

v Vuốt tóc: khi suy nghĩ một vấn đề

v Gãi đầu: khi đang phân vân

v Vuốt mũi: khi không xử lý được vấn đề gì đó

v Chắp hai bàn tay: khi đang tập trung tư tưởng

v Bẻ ngón tay: khi chưa kiếm ra giải pháp

v Nhìn xuống đất và đưa tay lên trán che mắt: khi không tâm đắc với 1

vấn đề gì

v Gật gù: khi cảm thấy thú vị

v Khoanh tay: không dễ nhảy vào cuộc chơi

v Giơ cả hai tay khi muốn nhập cuộc

v Ngồi khoanh chân chữ ngũ: chờ thời

v Để cả hai chân xuống đất và đưa đầu 1 cách xông xáo: đang muốn tấn

công, cần đề phòng

v Ngủ gật

Chấp nhận quyết định của khách

vĐồng ý:

§ Đừng thay đổi thái độ đột ngột

§ Đừng quá sung sướng như đã lừa khách

§ Cảm ơn đối tác đã dành thời gian

§ Tiếp tục duy trì quan hệ để tìm cơ hội

Price negotiation One important factor in the approach to negotiation is the type

of product There are four categories:

•Commodities: such as copper, coal, wheat, meat, and metals Price

is set by market supply and demand and can fluctuate widely.

Negotiation is concerned with contracts for future prices

•Standard products: These items are provided by many suppliers.

Since the items are standard and the choice of suppliers large, prices

are determined on the basis of listed catalog prices There is not

much room for negotiation except for large purchases.

•Items of small value: Firms will negotiate a contract with a

supplier that can supply many items and set up a simple ordering

system that reduces the cost of ordering.

• Made-to-order items: This category includes items made to

specification or for which quotations from several sources are

received These can generally be negotiated.

Price discount based on the quantity or monetary value of the buyer’s purchase

Price discount resulting from supplier production economies of scale

Price discount based on seasonal nature of goods or services

Cash discount determined by negotiations

Contracting

v Purchase order – PO defines nature of contract

v Requirements for unspecified delivery – a blanket or

standing order

v Definite quantity – contract defines a specific quantity

over a time frame, but no specific delivery dates

v Fixed price – contract requires buyer to cover a certain

level of cost

v Cost-based- contract requires buyer to cover a certain

level of cost

goods at negotiated price

v Revenue and cost sharing – contract requires buyer to

share portion of sales revenue in exchange for

discounts

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Step 4: Design Collaboration

On going specification and standardization review Value analysis

Cost analysis Design analysis Purchasing and the design process

rative

Collabo-Enables sharing of technology and design information

Makes products easier to

manufacture or assemble

Faster time to market

Access to core competencies

Saves time and

resources

Fewer engineering design

changes and quality problems

Advantages of Collaborative supplier involvement

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Expand core competencies:

Expand value creation

SRM enables buyers and sellers to expand the value they provide to the marketplace

Step 5: Supplier Relationship Management (SRM)

SRM: A comprehensive approach to managing an enterprise’s

interactions with the organizations that supply the goods and

services the enterprises uses