EBUS506 Supplier

R e l a t i o n s h i p s (1/2)

Dr. Akshit Singh

[email protected]
129, ULMS, Chatham Street
Office Hours: Flexible (arrange via email)
 Today’s Learning Objectives
TO:
Identify the main drivers of make-or-buy
decisions
Apply supplier selection and assessment
techniques contextually to real life cases,
including the Total Cost of Ownership
Describe the reasons behind global sourcing
and reshoring decisions, and their associated
advantages and disadvantages
T h e M a k e (Insourcing)-or-Buy (Outsourcing)
Decision

During the initial stage of the purchasing process,

the company is faced with the make-or-buy question
Outsourcing: the decision and subsequent transfer
process by which activities that earlier had been
performed internally are transferred to an external
party (Axelsson &Wynstra, 2002)
Divestment of assets, infrastructure, people and
competencies
 T h e M a k e (Insourcing)-or-Buy (Outsourcing)
Decision

Motivations for outsourcing:

1. Cost driven
2. Strategy driven
3. Politically driven

What are some of the advantages and disadvantages of outsourcing?

T h e Ou tso u rc in g Matrix (van Weele, 2014)
Level of competitiveness relative

High Maintain In-house / invest

to suppliers

Low Outsource Collaborate / maintain

control

Low High

Strategic importance of competence

T r a n s a c t i o n C o s t E c o n o m i c s (TCE)

• Williamson (1985) used TCEto examine the make-

or-buy decision
• The overall aim in TCE is to find the governance
structure that minimizes the sum of production costs
and transaction costs
• Transaction costs are ‘the costs of using the market to
purchase products and services’ (Domberger, 1998: 60)
• 3 elements of TCE:
– Opportunism
– Bounded rationality
– Asset specificity
 Bounded Rationality

Ball point pen New product development

project

• Specification complex and

• Easy to specify subjective
• Easy to check quality • Will change during project
• Limited number of • Difficult to measure quality
possible failures in • Huge number of
product/service contingencies
• Contract can be written • Contract can never be
to cover most outcomes complete
 A s s e t Specificity

Cus tome rs

Supplier

May be:
- physical
- organisational
 Governance Mechanisms

Opportunism by supplier General clause

Absent Bliss
contracting

Comprehensive Serious contractual

Present
contracting difficulties

Absent Admitted

Bounded rationality for the buyer

Adapted from Williamson (1985)

Supplier Selection a n d A s s e s s m e n t

What to assess
Short-term vs. longer-term ability to supply
 Supplier A s s e s s m e n t a n d Selection
Short-term ability to supply Longer-term ability to supply

Range of products orservices provided Potential for innovation

Quality of products or services Ease of doing business

Responsiveness Willingness to share risk

Long-term commitment to supply

Dependability of supply

Delivery and volume flexibility Ability to transfer knowledge as well as

products and services
Total cost of being supplied Financial stability
Supplier Selection a n d A s s e s s m e n t

What to assess
Short-term vs. longer-term ability to supply
Carter’s 10 C’s 1. Competency
2. Capacity
Supplier assessment methods
3. Consistency
Supplier-provided information
4. Control
Supplier visits
5. Cost
Use of preferred suppliers
6. Commitment
7. Cash
8. Clean
9. Culture
10. Communication
Supplier Selection a n d A s s e s s m e n t

What to assess
Short-term vs. longer-term ability to supply
Carter’s 10 C’s
Self-assessment
Supplier assessment methods questionnaire: see handout
Supplier-provided information
Supplier visits
Use of preferred suppliers
 Supplier A s s e s s m e n t Techniques

• Weighted-score method:
List relevant factors; allocate a score to each factor;
weight each score relative to the significance of the
factor; calculate the overall weighted score
• Cost-based techniques:
Seek to quantify the total cost of doing business
with a supplier (Total Cost of Ownership)

See also: De Boer et al. (2001),“A review of methods supporting supplier

selection”, European Journal of Purchasing & Supply Management, 7, 75-89.
 Weighted-score Method: Example
Weighted
Factors Weight Score
score
Delivery performance
Performance to promise 10 2 20
Lead time requirements 10 1 10
Quality
Process control systems 20 4 80
Total quality commitment 10 4 40
Cost structure
Costs relative to industry 20 4 60
Cost control / reductionefforts 10 3 30
Technical / process capability
Product innovation 5 4 20
Process innovation 5 5 25
General
Environmental compliance 5 3 15
Supplier’s sourcing policies 5 5 25
Total weighted score 350
Scale: 1 = Poor; 3 = Average; 5 =Excellent
 Weighted-score Method

• Weighted-score methods can be used to generate

supplier scorecards
FedEx supplier scorecard: see handout on Vital
 C o s t - b a s e d T ech n i q u es : Total C o s t of
O w n e r s h i p (TCO)
The combination of the purchase or acquisition price
of a good/service and additional costs incurred before
and after product/service delivery
Pre-transaction costs Management
Transaction costs
Post-transaction costs

Ellram & Siferd (1998), Quality TCO Communication

Zsidisin & Ellram (2001)

P ric e Delivery
 C o s t - b a s e d T ech n i q u es : Total C o s t of
O w n e r s h i p (TCO)
The combination of the purchase or acquisition price
of a good/service and additional costs incurred before
and after product/service delivery
Pre-transaction costs Management
Transaction costs
Post-transaction costs

Ellram &Siferd (1998), Quality TCO Communication

Zsidisin &Ellram (2001)

“The total cost of sourcing from China”:PPlatts

ric e &Song (2010)
De live ryidentified
36 costs that UK companies sourcing from China should consider!
 TCO E x a m p l e

The Automotive c a s e
TCO: E x a m p l e See handout on
Vital

SUPPLIER 1 SUPPLIER 2

Unit price (1 to 999 units/order) $510 $505

Unit price (1,000 to 2,999 units/order) $500 $498
Unit price (3,000 + units/order) $490 $488
Tooling costs $22,000 $20,000
Terms 2/10, net 30 1/10, net 30
Distance 125 miles 100 miles
Supplier quality rating (defects) 2% 3%
Supplier delivery rating (late delivery) 1% 2%
TCO: E x a m p l e

• Terms of payment
– 2/10 net 30: the buyer must pay within 30 days of the invoice
date, but they will receive a 2% discount if they pay within 10
days of the invoice date
• Costs to assess
– Purchasing cost
– Tooling cost
– Cash discount
– Transportation cost
– Ordering cost
– Inventory carrying cost
– Quality cost
– Late delivery cost
TCO: E x a m p l e

• Critical purchase (engines)

• Engines ordered in lot sizes of 1,000 units each
• Late delivery would cause 50% lost purchase and 50% back
orders
• Freight rates:
– Truckload (TL>= 40,000 lbs) $0.80 per ton-mile
– Less-than-truckload (LTL) $1.20 per ton-mile

(per ton-mile = 2,000 lbs per mile)

TCO: E x a m p l e

Requirements (annual forecast) 12,000 units

Weight per engine 22 pounds

Order processing cost $125/order

Inventory carrying rate 20% per year

Cost of working capital 10% per year

Profit margin 18%

Price of finished ATV $4,500

Back-order cost $15 per unit

 Global Sourcing

• International trade
• Foreign Direct Investments (FDI)
 F o r e i g n D i r e c t I n v e s t m e n t s (FDI)
FDI: Directly investing in activities that control and
manage value creation in other countries
Value chain stage: Horizontal vs. Vertical FDI

Home country Host country Home country Host country

 Global Sourcing

• Relevant decisions
– Corporate boundary decision: Make-or-buy
– Location decision:
• Where to locate in-house operations
• Where to source bought-in parts and/or services
Outsourcing a n d Offshoring

Based on Sako (2006)

 R e a s o n s for S o u r c i n g Globally
•Gaining access to cheaper or previously unavailable resources, such as
materials, components, services or labour
•New technologies and reduced commercial barriers
•Gaining access to new markets or presenting a brand presence in foreign
countries
•Reacting to competitor behaviour
•Taking advantage of exchange rates or even accessing favourable taxation
opportunities
Is it ethical behaviour? Is it sustainablebehaviour?
 E x c h a n g e R a t e s & Global Supply Chains

• The exchange rate is the price of one currency expressed in

terms of another – for instance £1 = $1.32
• This is crucial to businesses selling goods and services abroad
(exporters) a s well a s those firms who wish to buy products
from other countries (importers).
• When the home countries exchange rate rises in value, this
makes exporters' goods more expensive to buyers in other
countries.
• A higher exchange rate also makes imports c h e a p e r when
bought in the UK. This is good news for UK firms who may need
to import raw materials, components and finished products from
abroad.
 Global Vs. D o m e s t i c S o u r ci n g B a l a n c e

• Global and domestic sourcing can be

successfully combined to minimize the
cost/flexibility trade off
• Factors to be considered for mixed sourcing
strategies include: (Jin, 2004)
– The nature of demand: Innovative Vs. Functional products
(Fisher)
– Manufacturing technology
– Clusters of domestic subcontractors
– Long-term relationships with domestic subcontractors
 Re s h o r in g
• Reshoring happens when firms decide to return the
production or services provision back to the home country
from previously global sourcing (both captive and
outsourced reshoring modes)

• Reshoring decisions could be:

– A short-term rectification of previous
offshoring decisions; or
– Actively contributing to a company’s long-term strategy
 Re s h o r in g
• Possible reshoring modes (Gray et al., 2013):
– In-house reshoring
– Reshoring for outsourcing
– Reshoring for insourcing
– Outsourced reshoring

• Risks faced by reshorers include: higher wage, training costs;

lack of UK specialised skills and the need for external
financial and operational support both prior and during the
execution of the reshoring project
 What have w e learned today
• Key drivers of make-or-buy decisions include the strategic importance
of a competence and the level of competitiveness compared with
potential suppliers
• Transaction Cost Economics (TCE) provides a useful ‘lens’ to analyse
outsourcing decisions in the supply chain and decide on the most
appropriate governance mechanisms in buyer-supplier relationships
• Supplier assessment should take into account product / service
attributes and supplier performance a s well a s the underlying
capabilities of the supplier
• Two of the main techniques for assessing and selecting suppliers are
the weighted-score method and the Total Cost of Ownership
technique
• The main reasons for sourcing globally include: gaining access to
cheaper resources, distinctive resources, and, establishing a
presence in new markets
• Reshoring may not be ‘the’ competitive advantage for all companies,
but it is on the rise both in the UK and globally