Strategic Sourcing Decisions:

Introduction
Luis A. Moncayo Martnez
Diploma in Operations Planning and Management
Instituto Tecnol
ogico Aut
onomo de M
exico

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Table of contents
1

Supply chain management and logistics

Components of a logistic system
Decision making in logistics
Logistic strategys Objectives

Process Modelling
Value chain framework of M. Porter
Supply-Chain Operations Reference-model
Planning triangle

Drivers of SC performance

Metrics

Importance of Supply Chain

Concept of Logistics
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Why is Supply Chain Management (SCM) important?

In the 1980s new strategies that allowed companies to reduce cost and
better compete in different markets appeared. Strategies such as
just-in-time manufacturing, kanban, lean manufacturing, total quality
management, and others became popular. Corporations invested an
enormous amount of resources in implement them.
However, in the last few years many corporations have realised than an
efficient and integrated SC is the next step forward in order to minimise
cost and products lead time.

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Why is Supply Chain Management (SCM) important?

Two examples
Dell Computers applies a strategy called Virtual Integration in
which the SC is integrated with its suppliers by means of information
technologies that enable it to reduce the computer lead time to only
five days and get revenues of US$12 billions in thirteen years
Procter & Gamble reported it saved its retailers customers US$65
millions in an eighteen-month SC initiative in which the manufactures
and suppliers work closely

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Concept

According to Simchi-Levi et al. (2003)

SC Management (SCM) is a set of approaches utilised to efficiently
integrate suppliers, manufacturers, warehouses, and stores, so that
merchandise is produced and distributed at the right quantity, to the right
location, and at the right time, in order to minimise system wide costs
while satisfying service level requirements

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Concept (Cont.)

According to the Council of Logistics Management:

The process of planning, implementing, and controlling the efficient, cost
effective flow and storage of raw materials, in-process inventory, finished
goods, and related information from point-of-origin to
point-of-consumption for the purpose of conforming to customer
requirements.

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Concept (Cont.)

Other names includes:

Business logistics management
Logistics management
Material management
Distribution, planning and controlling

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Concept (Cont.)

Supply chain or Logistics management

- is a discipline that links the Market Place, Procurement Activities, and
Manufacturing Facilities in a network,
- a set of approaches utilised to efficiently integrate suppliers,
manufacturers, warehouses, and stores so the merchandise is produced
and distributed in the right quantities, to the right locations, and at
the right time.

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Components - Management
There are six key elements to a supply chain:
1

Production

Supply
Inventory
Location
Transportation

3
4
5
6

Information

Three flows:
1

From supplier to customers a dominant flow of finished products and

services
Backwards dominate flow of both demand and design information as
well as reverse logistics
Backwards and forwards any piece of information (financial, inventory,
etc.)
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Components - Network

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Supply Chain processes

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Difficulties in SC processes

Multiple business functions are impacted

There are trade-offs among conflicts objectives
There are business issues unique to each logistic systems
Quantitative analysis is essential for intelligent decisions

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Difficulties in SC processes (Cont.)

It is challenging to design and operate a SC so that total systemwide

costs are minimised, and system wide service level are maintained
Uncertainty is inherent in every SC; customer demand can never be
forecast exactly, travel times will never be certain, and machines and
vehicles will break down

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Objectives

To get the most profit, a company must have at least four main objectives:
Provide:
1

Provide best customer service

lowest production costs

lowest inventory investment

lowest distribution costs

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Objectives (Cont.)

Aims:
1

Minimise systemwide costs (inventory, transportation, raw material,

manufacturing, order fulfilment, ...)

Satisfy service level (time, availability, ...)

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Process Modelling

When analysing SC, the modelling process is an important first

cornerstone. In this context several questions arise.
Which process are important for the SC?
How can these processes be modelled?

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Process Modelling (Cont.)

To answer the first question, the Global Supply Chain Forum identifies
eight core SC process
1

Customer relationship management

Customer service management

Demand management

Order fulfilment

Manufacturing flow management

Supplier relationship management (procurement)

Product development and commercialization

Return management (return)

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Process Views of a SC (Chopra & Meindl, 2010)

Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Suppliers

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Value chain framework of M. Porter

SC managements process orientation has been stressed before and since

Porters introduction of the value chain paradigm has been developed in
economics. This process oriented management leads to superior results
compared to the traditional focus on functions.

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Infrastructure
Human Resource Management
Technology Development

n
rg i
Ma

Support
Activities

Value chain framework of M. Porter (Cont.)

Service

Marketing and
Sales

Outbound Logistics

Operations

rgi

Ma

Inbound Logistics

Procurement

Primary Activities

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Value chain framework of M. Porter (Cont.)

Channel
Value Chains

Supplier
Value Chains

Customer
Value Chains

Organisations
Value Chain

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What is a process reference model?

BUSINESS PROCESS
RE-ENGINEERING

BENCHMARKING

BEST PRACTISES
ANALYSIS

"as-is" state for desire "to-be"

future state

Capture the "as-is" state

of a process and derive
the desire "to-be" future
state
Quantify the operational
performance of similar
companies ans establish
internal targets based on
"best-in-class" results

Quantify operation performance

and establish "best-in.class"
results

Characterise the management practises and software

solutions that results in
"best-in-class" performance

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PROCESS REFERENCE
MODEL

Strategic Sourcing Decisions

Characterise the management

practises and software sol.

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SCOR-Model

It consists of a system of process definitions that are used to standardise

processes relevant for SCM. The standard processes are divided into four
hierarchical levels:
1

Process type

Process categories

Process elements

Implantation

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SCOR-Model (Cont.)
Level 1 - Process Types

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SCOR-Model (Cont.)
Level 2 - Process Categories

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SCOR-Model (Cont.)
Level 3 - Process Elements
(Customer) Customer requirements
(D1.3, D1.10) Order backlog, shipments
(EP.3) Planning data
(EP.9) Revised aggregate forecast and projections, revised business assumptions

P1.1
Identify, prioritise,
and aggregate
supply chain
requirements

P1.2
Identify, assess, and
aggregate supply
chain resources
(P2.4) Sourcing plans
(P3.4) Product make plans
(P4.4) Delivery plans
(EP.3) Planning data

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(EP.1) Planning decision policies

(EP.2) Supply chain performance improvement plan
(EP.4) Inventory strategy

P1.3

P1.4

Balance supply chain

resources with supply
chain requirements

Establish and
communicate
supply chain plans
Supply chain plans
(P2.1, P3.1, P4.1) (Customer)

(EP.5, EP.6) Projected internal and external production capacity

(EP.5, EP.6) Revised capital plan
(EP.5, EP.6) Outsource plan
(EP.8) Regulatory requirements

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The Planning triangle, (Ballou, 2004)

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Framework for structuring drivers

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Responsiveness spectrum

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1. Facilities
Capacity
Utilization
Theoretical flow/cycle time of production
Actual average flow/cycle time
Flow time efficiency
Product variety
Volume contribution of top 20% SKUs and customers
Processing/setup/down/idle time
Average production batch size
Production service level
Example: Toyota and Honda
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2. Inventory

Average inventory
Products with more that a specified number of days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate
Fraction time out of stock
Example: Nordstrom (US retailer)

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3. Transportation

Average inbound transportation cost

Average inbound transportation cost per shipment
Average outbound transportation cost
Average outbound shipment size
Average outbound transportation cost per shipment
Fraction transported by mode
Example: Laura Ashley sells clothing and other household item through a
mail-order catalogue

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4. Information

Forecast horizon
Frequency of update
Forecast error
Seasonal factor
Variance from plan
Example: Dell computers

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5. Sourcing

Days payable outstanding

Average purchase price
Range of purchase price
Average purchase quantity
Fraction on-time deliveries
Supply lead time
Example: Cisco

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6. Pricing

Profit margin
Days sales outstanding
Average sale price
Average order size
Range of sale price
Range of period sale
Example: Amazon

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Why SC management is important?

Supply and distribution lines are lengthening

Costs are significant
Logistics is important to strategy
Logistics add significant customer value which is understood as: form,
time, place, and position
Customers increasingly want quick customised response

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Why SC management is important? (Cont.)

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Making-decision levels

The key issues in SCM span a large spectrum of a firms activities, from
strategic through the tactical to the operational levels.
Strategic level deals with decisions that have a long-lasting effect on
the firm
Tactical level includes decisions that are typically updated anywhere
between once every quarter and once every year
Operational level refers to day-to-day decisions

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Making-decision levels

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Concept of Logistics

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Concept of Logistics

What is Logistics?
Part of the supply chain process that plans, implements, and controls
the efficient, effective forward and reverse flow and storage of goods,
services, and related information between the point of origin and the point
of consumption in order to meet customers requirements

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Concept of Logistics (Cont.)

LOGISTICS

Storage

Flow of Materials

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Importance of Logistics)

Logistics is about creating value

Products and services have no value unless there are in possession of the
customer:
1

when (time) and

where (place)

they wish to consume them. Values is added when customers are willing to
pay more for a product or service than the cost to place it in their hands.

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Importance of Logistics (Cont.)

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