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Assignment On Contracting: by Jawed Mussarat

The document discusses various aspects of outsourcing and sourcing in supply chains. It covers the benefits and risks of outsourcing versus keeping operations in-house. Key benefits include achieving economies of scale, inventory aggregation, and information aggregation. However, outsourcing also brings risks like less control and competitive implications. The document also discusses supplier selection, assessment, contracts, and design collaboration with suppliers.

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tehami
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38 views

Assignment On Contracting: by Jawed Mussarat

The document discusses various aspects of outsourcing and sourcing in supply chains. It covers the benefits and risks of outsourcing versus keeping operations in-house. Key benefits include achieving economies of scale, inventory aggregation, and information aggregation. However, outsourcing also brings risks like less control and competitive implications. The document also discusses supplier selection, assessment, contracts, and design collaboration with suppliers.

Uploaded by

tehami
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment

On
contracting
By jawed mussarat
Sourcing in Supply Chains
Sourcing in Supply Chains • How to buy goods and services required to run the
firm? Whom to buy from? • Issues include – In-House operations vs. Outsourcing
– Supplier assessment & selection – Contract development – Procurement •
Outsourcing vs. Offshoring vs. Offsourcing
In-House vs. Outsourcing
Outsourcing to a third party can increase overall supply chain value. The third
party might be – more cost-effective – more skilled or specialized – more capable
of higher quality However… • Outsourcing also entails risk arising from – less
control – less security – competitive implications
How can Outsourcing Increase Value
Capacity Aggregation – Yields production economies of scale beyond what a
single company can obtain – Outsourcing to these companies is best for products
whose volume requirements are lower than those required to gain economies of
scale – Dell, Gateway, HP all outsource to Intel, which aggregates capacity across
many manufacturers – BMW, Mercedes, Chrysler, Saab all outsource final
assembly to Magna Steyr, which uses flexible capacity & labor to do low volume
automobile assembly (X3, G Class, Grand Cherokee, 9-3 Cabrio) • Inventory
Aggregation – Yields reduction in uncertainty and better economies of scale in
purchasing & transportation – Outsourcing to these companies is best for products
with highly uncertain and fragmented demand – W.W.Grainger: consolidates
demand for MRO supplies from many customers – Common in many developing
countries
Information Aggregation – Yields benefits by providing higher/more information
aggregation than individual companies – Adds most value when both buyers and
sellers are fragmented with variable transactions – eBags & W.W.Grainger
consolidate information for many manufacturers (through a web-site or detailed
product catalogs) – Many on-line companies (e.g., eBay, FreeMarkets) • Lower
Costs & Higher Quality – Yields benefits by outsourcing to a company that is
specialized or located at a place where they can make things much cheaper –
Must consider outsourcing vs. offshoring in such cases
Outsourcing: Key Points
In general, the three important factors in outsourcing are • Scale: The larger the
scale the lower the benefits from outsourcing • Uncertainty: The more predictable
the needs the less likely that one could benefit from outsourcing • Specifity of
Assets: If the assets of the third-party are very company specific, the lower the
chances that it can act as an effective outsourcing agent Bottom Line Maximum
gains from outsourcing to a third party are obtained when a company’s needs are
relatively small and uncertain/variable and the third party is used by many such
companies.
Risks Inherent in Outsourcing
Elevated costs of coordination – Especially important when many third parties are
involved • Reduced direct contact with customer • Competitive implications –
Reduced internal capability – Danger of overdependence on third party – Leakage
of sensitive data/information • Ineffective contracts • Use of outsourcing as a
solution to fundamental flaws in the original supply chain
Third Party Logistics (3PL) Providers
Many firms that “do it all” but many that focus on specific functions –
Transportation: inbound or outbound, rail, truck, air, ship – Warehousing: storage,
facilities management – Reverse logistics: returns, recycling – Information
technology: specialized software, information systems – International: customs,
port services – Special skills: hazardous materials, cold chain, package delivery •
Tendency toward a blend of logistics and manufacturing in 3PL providers • E.g.,
UPS, FedEx, Schneider, GENCO, i2 • 4PL Companies: assemble and integrate
various services for a complete logistics solution
Supplier Scoring & Assessment
Key Point: Suppliers should be compared not just on purchase price but based on
their impact on total cost • Total cost includes purchase price, cycle and safety
stocks, transportation, and time required to introduce new products
Factors to consider include
Lead Time On-Time Performance Flexibility Delivery Frequency / Minimum Lot
Size Quality Transportation Cost

Pricing Terms o Quantity discounts o Payment due dates Information Coordination


Capability Design Collaboration Capability Exchange Rates, Taxes, Duties
Supplier Viability
Supplier Assessment: An Example
A company buys bearings to manufacture lawn mowers & snow blowers. • Weekly
demand for bearings has a mean of 1,000 with std. dev. of 300. • The company
aims for a cycle service level of 95% and uses an annual holding rate of 25% on
the dollar; order placement and receipt costs are about $9.60 per order. • The
company currently buys from a local supplier who charges $1.00 per bearing.
Based on prior history, the supplier has a delivery lead time of 2 weeks with a std.
dev. of 1 wk. • An overseas source has been located who claims he will discount
this $1 per bearing price as long as you buy at least 8,000 at a time. However, this
source has a mean lead time of 6 weeks with a std. dev. of 4 wks. Also order
placement and receipt will now run to about $10 per order. • How much should the
company be willing to pay if it decides to switch suppliers? Would a price of $0.98
per bearing be acceptable?
Supplier Selection
Single vs. Multiple suppliers • Selection – Typically preceded by a qualification
process – This is followed by allowing them to bid based on cost/price •
Competitive bidding – Sealed-bid tenders – “Winner’s curse” phenomenon! •
Auctions – English Auctions – Dutch Auctions – Vickrey Auctions – Should the
winning bidder always be selected? – Should we worry about collusion?
Contracts
Specify terms for the buyer-supplier relationship • Have a strong effect on how the
supply chain performs – Therefore they must be designed to facilitate desirable
outcomes and minimize undesirable ones! • Key issues when developing a
contract: – How does it affect the company’s profits, but also, how does it affect
total profits across the supply chain? – How does it affect supplier performance
(on different measures such as cost, time, quality, etc.) • Objective is to develop a
contract that “grows the size of the pie” as opposed to separately maximizing
profits for the buyer and the supplier. • Design contracts that encourage a buyer to
purchase more and increase the level of product availability, but ensure that the
supplier also shares in some of the buyer’s demand uncertainty.
Common Types of Contracts
Buyback Contracts – Supplier allows retailer to return unsold inventory, up to
some specified amount, at an agreed-upon price. – Holding cost subsidies (e.g.,
auto industry) & price support (e.g., high-tech) can be considered special cases of
buy-back contracts – E.g., booksellers, music retailers, fashion goods retailers •
Revenue-Sharing Contracts – Supplier charges retailer a lower wholesale price,
but shares a fraction of the retailer’s sales revenue – Best suited for products with
low variable costs and high return costs – E.g., movie studios to Blockbuster •
Quantity-Flexible Contracts – Supplier allows retailer to change the quantity
ordered after observing demand; supplier guarantees supply of up to some
maximum amount, and retailer agrees to buy at least some minimum amount –
Most effective when return costs are high – E.g., Electronics and computers
industry, Benetton
Advantages and Disadvantages of Contracts
Benefits – Allows both retailer and supplier to increase profits – Retailer’s risk is
shared by supplier; in return retailer buys more and provides higher availability
Disadvantages
Drawbacks – All of these contracts could lead to lower retailer effort in case of
overstocking; often countered by setting limits on buy-back amounts – Additional
cost of returns, salvage and disposal must all be considered (for buy-backs) –
With many retailers present, inventory is not centralized at the supplier; this
disaggregation at retailers leads to more overall inventory in the supply chain •
Retailers can sometimes reserve space or production capacity at the supplier’s
facility
Design Collaboration
Crucial for collaboration with suppliers at product design stage – 80% of a product
cost is fixed in the design stage – 50-70% of spending is through procurement •
Can lower cost of purchased goods, manufacturing costs and logistics • Can
speed up product development time significantly • Especially important in highly
customized products: design for postponement will allow lower inventory • Very
common in the auto industry

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