CHAPTER 4 – SOURCING DECISIONS IN A SUPPLY CHAIN

Dung H. Nguyen
Faculty of International Economic Relations
University of Economics and Law

‹#› Het begint met een idee

CONTENTS

 Role of sourcing in a supply chain

 Procurement
 Supplier selection
 Outsourcing
 In-house or outsource
 Total cost of ownership
 Designing a sourcing portfolio

2
Vrije Universiteit Amsterdam
AN AIRBUS A380

An A380 is made up of ~ 4 million parts produced by 1,500 companies from

30 countries

Source: edition.cnn.com & airbus.com 3

Vrije Universiteit Amsterdam
AN IPHONE 13 PRO MAX

> 2,000 components

Source: asia.nikkei.com 4
Vrije Universiteit Amsterdam
ROLE OF SOURCING IN A SUPPLY CHAIN

Sourcing is the entire set of business processes required to purchase

goods and services

Supply – Procurement – Purchasing

Supply management is the identification, acquisition, access,

positioning, and management of resources and related capabilities an
organization needs or potentially needs to achieve strategic objectives.

5
Vrije Universiteit Amsterdam
ROLE OF SOURCING IN A SUPPLY CHAIN

Benefits from effective sourcing decisions

 Right source: quality & cost
 Economies of scale
 Efficient procurement transactions
 Design collaboration in manufacturing
 Better collaboration with suppliers
 Appropriate sharing risks and benefits
 Lower purchase price due to increasing competition

4
Vrije Universiteit Amsterdam
PROCUREMENT AIMS

To ensure a reliable supply of materials in an organization

 Organizing a reliable, uninterupted flow of materials
 Developing relationships with user departments
 Finding good suppliers
 Buying right materials (right quality, right time, right place)
 Good prices and conditions
 Low stocks at the required service level
 Moving materials quickly through a supply chain
 Keeping abreast of conditions (price increase, scarcity, new product)

7
Vrije Universiteit Amsterdam
PURCHASING PROCESS

User department Procurement Suppliers

1. identify need

requests purchase 2. receive request

process

request quotations 3. receive request

process

4. receive quotation send quotation

discuss discuss and process

send purchase order 5. receive order

process

ship goods and

6. receive and check invoice
7. receive and check transfer

authorize payment 8. arrange payment receive payment

Source: Waters (2003)

8
Vrije Universiteit Amsterdam
ORGANIZATIONAL STRUCTURE OF PURCHASING

Centralized purchasing structure:

• Leverage purchase volumes

• Reduced duplication Decentralized purchasing structure:

• Coordination of purchasing • Speed and responsiveness

strategies/plans • Understanding unique
• Coordination of purchasing requirements
systems • NPD support
• Development of specialized • Ownership of purchasing
expertise decisions
• Meeting company’s goals &
change
9
Vrije Universiteit Amsterdam
STRATEGIC SOURCING PROCESS

Source: Monczka et al. (2016)

10
Vrije Universiteit Amsterdam
SUPPLIER EVALUATION AND SELECTION PROCESS

1. Recognize the need for supplier selection

2. Identify key sourcing requirements
3. Identify the potential supply sources
4. Determine the sourcing strategy
5. Limit suppliers in the selection pool
6. Determine method of supplier evaluation and selection
7. Select and reach agreement

11
Vrije Universiteit Amsterdam
STEPS OF CHOOSING A SUPPLIER

 List of alternative suppliers

 Compare suppliers
 Shortlist (4 or 5 suppliers)
 Send request for quotation to suppliers
 Receive bids from suppliers
 Evaluate bids (incl. preliminary, technical, commercial evaluation)
 Discuss condition bids with potential suppliers
 Choose the supplier
 Discuss final details with the chosen supplier

12
Vrije Universiteit Amsterdam
SUPPLIER SELECTION

 Process and product technologies

 Willingness to share technologies and information
 Quality
 Cost
 Reliability
 Order system and cycle time
 Capacity
 Communication capability
 Location
 Service
13
Vrije Universiteit Amsterdam
SUPPLIER QUALITY

 The ability to meet or exceed buyer expectations and

requirements
 Current and future customer expectations or requirements
 Within critical performance areas on a consistent basis

TOTAL QUALITY MANAGEMENT

14
Vrije Universiteit Amsterdam
NUMBER OF SUPPLIERS

 Single supplier:

• Good relationship

• Less quality variability

• Lower cost

• Transportation economies  Multiple suppliers:

• Proprietary product/process • Need capacity

• Volume too small to split • Spread risk of interruption

• Create competition

• Get more information

• Deal with special businesses

15
Vrije Universiteit Amsterdam
SUPPLIER PERFORMANCE METRICS

 Cost/price
 Quality
 Delivery
 Responsiveness and flexibility
 Environment
 Technology
 Business metrics
 Total cost of ownership

16
Vrije Universiteit Amsterdam
SUPPLIER DEVELOPMENT

 Identify critical goods & services

 Identify critical suppliers, NOT meeting performance requirements
 Form a cross-functional supplier development team
 Meet with top management of suppliers
 Rank supplier development projects
 Define details of the buyer-supplier agreement
 Monitor project status and modify strategies

17
Vrije Universiteit Amsterdam
OUTSOURCING

A supply chain function is performed by a third party

Benefits
 Economies of scale
 Risk pooling
 Reduce capital investment
 Focus on core competency
 Increased flexibility
Risks
 Loss of competitive knowledge
 Conflicting objectives

18
Vrije Universiteit Amsterdam
ECONOMIES OF SCALE FROM OUTSOURCING

 Capacity aggregation
 Inventory aggregation
 Transportation aggregation by transportation intermediaries
 Transportation aggregation by storage intermediaries
 Warehousing aggregation
 Procurement aggregation
 Information aggregation

19
Vrije Universiteit Amsterdam
FACTORS REDUCING BENEFITS OF OUTSOURCING TO 3RD PARTY

 Scale is large enough for internal efficiency

 Uncertainty of a firm’s needs is low (risk pooling is not achieved)
 Specificity of assests required is high

20
Vrije Universiteit Amsterdam
RISKS OF USING A 3RD PARTY

 The process is broken

 Underestimation of the cost of coordination
 Reduced customer/supplier contact
 Loss of internal capability and growth in third-party power
 Ineffective contracts
 Loss of supply chain visibility
 Negative reputational impact

21
Vrije Universiteit Amsterdam
GLOBAL SOURCING

Firms expand their supply base to include foreign suppliers

Rationale for low cost country sourcing
 Low wage rates
 Increase the number of possible sources
 Use the best product and process technologies
 Local presence in international markets
Challenges for low cost country sourcing
 Identify relevant production sources
 Protection of intellectual property
 Import/export issues
 Communications
 Security in transit
 Long lead time
22
Vrije Universiteit Amsterdam
TOTAL COST OF OWNERSHIP

All supply chain costs of sourcing a good or services from a particular supplier
 Acquisition costs: all costs associated with the purchase of material from a
supplier to a buyer, ready for use
> E.g.: supplier price, taxes and duties, delivery costs,...
 Ownership costs: all costs part from the acquisition costs
> E.g.: inventory costs, warehousing costs, manufacturing costs,...
 Post-ownership costs: all costs after the finished product reaches the end
customer
> E.g.: warranty costs, environmental costs, reputation costs,...

 Other costs (for global sourcing): exchange rates, local inflation, labor
costs,...
23
Vrije Universiteit Amsterdam
TOTAL COST OF OWNERSHIP

Source: Chopra and Meindl (2016) 24

Vrije Universiteit Amsterdam
DESIGNING A SOURCING PORTFOLIO

 Whom to source from: Responsive or Efficient?

Source: Chopra and Meindl (2016)

25
Vrije Universiteit Amsterdam
DESIGNING A SOURCING PORTFOLIO

 Where to source from: On-shoring, Near-shoring, or Off-shoring?

Source: Chopra and Meindl (2016)

26
Vrije Universiteit Amsterdam
SOURCING STRATEGIES - KRALJIC'S FRAMEWORK

Source: Swink et al. (2014)

27
Vrije Universiteit Amsterdam
 CHAPTER 4 – SOURCING DECISIONS IN A SUPPLY CHAIN

THANK YOU!

‹#› Het begint met een idee