Logistics Management -TEAM FOUR

Chapter 7

Outsourcing Strategies and Evaluation

Process

At the end up this chapter the students Shall able to

- discuss the new development in the procurement of materials for

production;

- identify the factors in the right choice of outsourcing suppliers;

- Give the strategies in the outsourcing of materials of production;

- Discuss the factor involved in contract development;

- Enumerate the factors to consider in the transition to external outsourcing

model;

- Give the benefits that will be derived in the outsourcing of materials for
production; and

- Discuss the problems and cost associated in material outsourcing

The changing landscapes in the purchasing function

The development of long term Costumer satisfaction is the byword of every

entrepreneur. The product is the direct result of the manpower efficiency and
the kind of materials that goes the production line.

The buying organization has find ways of looking at suppliers that could offer
the best terms and quality materials. To be competitive in the market,
suppliers of materials are becoming important conduit in costumers
satisfaction.

The trend in the supply chain management is to reduce the supplier base
that could be leaned upon for quality materials at affordable price. The cost
in internal production is bigger when they make their own company.

The management philosophy of outsourcing has to led to the increasing role

of the purchasing department to strategically be involved in the control of
the vital inputs in the production process.

The development of professional managers in the field of purchasing has

increased through the years as competitive advantage raced towards
production economy. Their search is focused on supplier that produces
defective-free components and their value added services.

Outsourcing Material Inputs

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Outsourcing of materials from suppliers can produce many benefits than
material inputs internally. The internal production of materials actually a
backward integration process where company operates a separate unit of
production that is specifically concentrated in the production of parts and
components.

Toyota as an example of outsourced about 70% of its component parts and

concentrated on engines, mainframe, electronics and transmission and other
major parts.

The buying organization may be skilled in the following areas which are
important factors in the choice of right supplier:

1. Specification of the materials and component attributes

2. Product design and specifications

3. Forecasting the demand requirements

4. Quality specifications

5. Reasonable price index

Matching of the appropriate supplier must able to meet the above

requirements. These shall be based on long term partnership in the supply of
the materials needed.

The Index of Supplier Information

The strategic issue in the supply chain management system is the right
choice for the supplier of inputs in the production system. The various items
of materials could not be relied quality, price, and lead time delivery.

In the view of forging, buyers industry who are involved in the supply chain
management should be expert in supply negotiations, analysis, and
evaluation of the appropriate supplier. While the sources of information are
available in trade, journals, yellow pages of telephone companies, and the
websites such information should be validated, inspected and evaluated on
its applicability and suitability for their specific needs.

Strategic alliance of various departments in the buying organization must

complement each other in the proper selection and evaluation of the most
suitable supplier.

The strategy match between the buyer and the supplier should be looked
into as this partnership can be the basis of future profitability for both
organizations.

The strategy for outsourcing

 Logistics Management -TEAM FOUR
Outsourcing is the transfer of business process that has been traditionally
operated and managed internally to an independently owned external
service provider. The suppier maintained the total operating facilities their
technology and other operating assets.

Outsourcing is the decision of higher management when the study will show
that the company will be able to realized savings in terms of operating cost.

The evaluation process goes through the different stages as follows;

1. Strategic Evaluation

Is the process of seeing which of the internal sourcing of materials and the
external sourcing would be most profitable for the company. The end
question would be most appropriate operating scheme that would give the
company the greater benefits interms of cost and the derived advantage.

Outsourcing decision is predominantly attached to the standardization

process of product parts. The main component parts are to be made
internally and the lower value component parts must be given to external
suppliers.

2. Financial Evaluation

One of the critical point in the decision to outsource is the financial aspects
of the system as cost is associated with product quality. If materials are
sourced internally, the investment in machineries and technology must be
considered. In the Philippine setting, there is increasing labor disputes
associated with annual increase in wages.

3. Supplier Selection

The buying organization must carefully evaluate and analyze capability of

the supplying firm to supply the needed materials.

The functional evaluation should be related to the buying organization in

terms of company mission and vision as if they are the extension of the firm.

4. Contract Development

The development of long time partnership in the supply chain management

rested principally on the contract of the buying organization and the supplier
as the binding relationship.

A. The define scoop of work

B. The define scope of work elements in process to be supplied

C. Understanding on the level of flexibility as requirement changes

D. Consideration of short term contract and provision for extension and

renegotiation

E. Grounds rules for long term relationship

F. Determination of means for measuring performance for long time

partnerhip
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5. Transition to external sourcing model

The transitional relationship is the critical point in the implementation of the

outsourcing program. Adjustment of both parties in the implementation
programs must be made. Stipulated agreements on activities and the
resource must be put in place.

6. Relationship management

Effective relationship management hinges on effective communication with

the supplier especially along the area of monitoring and evaluation of the
suppliers performance. The buying organization should assist the supplier in
solving some technical problems, engineering design and other areas that
have to do with this product improvements.

Benefits of Outsourcing Policy

The final driving force in the outsourcing of materials is the reduction in

direct operating cost. In order for the outsourcing strategy to be
implemented, it must be attractive to the management of the buying
organization.

The following generic strategic benefits must be associated:

1. Cost Reduction

It aims to reduce direct opening cost in the maintenance of equipment and

facilities when manufacturing the less value added parts. The labor cost
associated with increase in wages and benefits are overhead cost fhaf must
be contained with by the management.

2. Refocus on corporate more competencies

The global competition is focused on the development of new and better

products. The core product of the organization needs improvement to meet
customer demand and satisfaction. By eliminating, the less value added
input in the line, the corporate goal of competitive advantage could be
given more attention in terms of research and new product development.

3. Performance effeciency and productivity

Performance effeciency is focused on developing new and quality products.

Increased productivity cool be attained as the supplier of inputs contributes
to the Just-in-time delivery of materials.

4. Corporate increase in the market share and revenue

Since the corporate organization could concentrate on its core products and
the marketing stategies are focused on costumer service, it is expected to
redound to more costumer demand and increase in the market share.

The specific benefits of material outsourcing

1. Reduce and control operating cost

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2. Improvement in product quality
3. Changes in company's focus to the core product
4. Acquire external capabilities
5. Refocus scarce resources for alternative uses
6. Reduce product cycle time
7. Obtain cash infusion
8. Reduce risk
9. Gain flexibility

10. Turn fix cost to variable cost

A contract required to legally protect interest of both partners in outsourcing.

It requires extensive strategic assessment and evaluation on the true
commitment to a cooperative relationship.

Outsourcing of materials input in the production of goods must create more

value as the main objective of the organization. Competitive advantage
hinges on the development of product quality at a reduced cost.

Outsourcing is a two-waybtraffic between the buyers and the material

supplier. The management relationships must be if mutual trust and
confidence. The development of corporate discipline will create long-term
partnership in the production of quality goods as input to quality finished
goods.

Problems and Cost Associated with Outsourcing

While there are benefits and advantage in outsourcing activities, the

outsourcing firm must be able to foresee some problems in order to avoid
possible occurrence in the course of its implementation. The decision to
outsource materials must take into consideration the following pertinent
problems or cost associated with outsourcing.

1. Quality of Materials

The cost of quality is the most important in sourcing decision. The quality
defects are experienced in the internal production of components and the
same is not absent on the external supply chain. The cost and problems in
ensuring quality can be looked along the following areas:

A. Preventive quality assurance

Preventive quality refers to the avoidance of defective materials before it

goes into the production. The price for quality inputs are experienced not
only when the materials are outsourced internally by the firm and more so
with the outside supplier.

B. Appraisal of supplied materials

The appraisal cost are associated with the salaries and allowances of the
outsourcing manager in the audit of material input interms if design,
engineering specification, inspection and monitoring mechanism while the
materials are in process.

C. Internal failure within the supplier

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When the buyer failed to detect materials quality as it goes onto the
manufacturing area, this will entail rework activities causing material scrap
and temporary downtime in the operation

D. External failure within the supplier

The external failure is the supplier's inability to deliver the needed materials
based on the specified time scheduled. It could also be associated with the
product quality defects, failure to meet engineering specifications, and delay
in production of quality materials.

2. Supplier relation management

Relationship management with supplier involves time and entails expenses

in manager's salaries and representations allowances. It is quite critical to
evaluate the intentions of the supplier until the relationship of mutual trust
and confidence has been established. The Japanese's experiencealomg this
line was successful due to their honesty in business deals.

It is difficult in other country's setting as some local executives have hidden

agenda getting more in the transactions. To reduce cost in travel allowance,
IT infrastructure must be put in place, Teleconferencing activities can be
done in office but the buyer must also have access to have the supplier's
production area to make periodical audit of the materials in process to
ensure delivery of quality products.

3. Problems related to internal coordination

Internal coordination interms of product design, engineering specifications,

quality assurance and other incremental problems related to on time
delivery and inspections incurred expenses in terms of managers salaries
and benefits.

4. Problems associated with the outsourcing implementation

The Americans have experienced great problem in the implementation of

outsourcing system as they were manufacturing most of their component
parts prior to benefits of contracting supplier.

Since the Japanese have developed local small entrepreneurs who opted to
collaborate with their mother organization, the transfer of technology in the
outsourcing of components poses no major problem.

In Toyota, only about 20% of the Toyota original parts are made in plant.
These are the main engine component, mainframe, electronics,
transmission, and other high value parts, and the rest, 80% are farmed our
to their trusted outsourcing suppliers within the complex.
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The Philippine experience in the Local Export Processing Zone is an example
of outsourcing the component parts, Foreign suppliers take advantage of the
low wage rate that are cost savings in manufacturing.

5. Product design and development

The critical factor in the materials outsourcing is the product design as it will
affect the component parts that will be put into the major product.

To reduce cost, the supplier must send their expert and engineering
specialist into the manufacturing organization. They should see the actual
design before they make the component parts.

Supply Risk Management

The supply chain disk management is a process of proactive analysis of the

outsourcing problems that nay interplay in the proper coordination and
implementation of the system. Specifically, risk can be measured interms of
profitability of its occurrence and the factors of severity and its adverse
effect when it happens.

The risk factors can be categorized into four phases:

1. Risk assessment

This is the process of looking back to the profitability of its occurrence in

terms of costumer relationship. Risk could be avoided of the buying
organization will look deeper info the supplier's financial and production
capability to supply the needed material.

2. Risk mitigation

It involves detailed analysis of what course of action van be done to reduce

it's occurrence it eliminate it's probability. Furter, it is an evaluation of the
severity of these adverse events while also considering advantage involved.

3. Risk monitoring system

Is the process of evaluating proactively the movements in the supply chain

management. This requires monitoring the supplier's financial capability to
supply the manufactures requirements.

4. Development if contingency plan

Any organization ti avoid the occurrence of risk must develop comprehensive

contingency plan. While it may be impossible to eliminate the problems
related to the supply chain management, it is most advisable that the buying
organization has already developed alternatives that van implemented
before the problem gets its root in the production system.

In the final analysis, outsourcing if materials can be alternative development

in Philippine business arena for local and export market.
 Logistics Management -TEAM FOUR
Chapter 8

Supplier Partnership and

Total Quality Management
At the end of this chapter the students shall able to:

- Give the importance of supplier in the production of goods;

- Discuss the importance o supply chain partnership;

- Give the importance of supplier's identification standards;

- Enumerate the benefits that will be derived in the supplier's long term
relationships;

- Give the relationship between purchasing and total quality management;

- Discuss the requirements for supplier's in the implementation of total

quality management;and

- Give the dimensions of quality.

The importance of supplier

The dynamics of market forces demand every organization to convert itself

to an virtual corporation for cost effectiveness and improved product quality.
In the virtual corporation, the focus us the building of core system.

Outsourcing has become the new byword in the intricate business conditions
as everyone is racing for quality product and market competitiveness. In the
manufacturing sector, outsourcing enables the manufacturer FL focus their
attention in the managing the quality of their brands rather than invest their
capital resources in producing lower value added component.

The supplier is selected based on their technical capabilities and their ability
to supply in short lead-time. There should be the existence of mutual
relationship of management trust and confidence once the relationship has
been established.

The supply chain partnership

Supply chain partnership has existed for a long period of time in the business
organization but has not been given abundant recognition until pioneering
organizations like Toyota has led the way for it's effective use. Partnership
moves beyond special transactional influence by involving effort of both
firms to coordinate functionally in their activities.
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Supplier standards identification

The selection if support must meet the standard requirement I teems of

quality , lead time delivery and other specifications stipulated in the
agreements. The experience of Toyota in the car industry is a living example
that made them the leading car manufacturer in the world ahead of the
many car industries ihbthe western countries.

The selected suppliers mysybbe clearly intimidated to the definition of the

following standard requirements:

1. Quantity Requirements

The required quantity of materials must be ready in the production line when
needed. The suppier must be able to commit the buying organization to
supply the specific quantity requirements based in the production schedule.

2. Quality Requirements

This is the one of the most critical points in the supply chain management.
Guarantee quality is the essence of the supplier index for continues
patronage and commitment.

3. Specifications for the required materials

The specifications are based on the following;

A. Style

The supplier must be able to supply the required materials based on design
and engineering specifications submmited by the organization.

B. Workmanship

The component features must be acceptable interms of workmanship. It

refers to the neatness and quality of finished product.

The supplier must be trusted to provide defect-free components through

coordination and training them in quality assurance.

C. Acceptable quality level

The level if quality must be met bet supplying organization. Acceptable level
means meeting the standard product specifications interms of thickness,
workmanship,and the other required standards of durability and
performance.

4. Delivery instruction

Providing the customer with the product they want. The important element
of costumer satistaction is on time delivery. The supplier must deliver the
products on specified schedule and the total amount required.
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5. Payment terms and conditions

The buyer welcomes low prices from support only when they are the result
genuine cost competitiveness. Good products sold at lower price increase
appeal to costumers.

The supplier must consistently strive to reduce cost. Their production effort
just be traslated to reduction of the processing cost. The terms of payment
are subject to amicable agreement if both parties. Long-term contract may
stipulate later payments for 30 days or longer depending on the capability of
the supplier to finance the material supply systemn short and small volume
delivery maybe negotiated on cash payments.

Intensified supplier relationships

The development of supplier relationship in fbe implementations of the

purchasing and supply management technique should ENE in the long-term
supply chain partnership. The building block is formed that allows the flow of
information and develops subsequent coordination in the delivery of quality
products.

The partnership dyad share goals as well as inherit risk in the business
system through joint planning and control. It seeks to create a supply chain
with increased information flow and enhanced loyalty.

The partnership and alliance may be able to arrive with decreased operating
cost. With coordinated planning and greater coordination by the buyer and
the supplier, both companies will decrease uncertainly, greater cost, savings
short cycle time and fewer inventories. Finally, greater quality products will
be delivered to satisfied costumer.

The two importance of partnership relationship are;

1. Interdependent relationships

Partnering involves an interdependent relationships of coordinated planning

and strategy; it is the evolving efforts of both parties to coordinate
functional activities.

2. Organizational strategy

Organizational synergy is the cooperative partnership of functional activities

that the two independent entities are working as one body.

Supply chain management

The changing business world of materials management has evolved to

realized the advantages enjoyed from sharing technology, information and
planning with other firms.

Supply chain management alliance began with the inclusion of the supplier
of materials in the cross-functional sourcing teams.
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The improvement of supply chain effectiveness is based on the philosophy of
strategic alliance and cooperation. It requires the total involvement of the
supplier in the planning of the material requirement of the buying firm.

Quality requirements for supplier

1. Material quality requirement

The supplier quality assurance in the materials delivery must be consistent

with the needed requirement of the production system. It must be assured
that quality components are the same with that of the expectations of the
buying company

2. Quality target commitment

The buying firm must specify in detail ghe agreed upon quality targets. The
following requirements must be addressed:

A. Parts per million (PPM) is the value of rejected parts divided by those
delivered

B. Field of failure of products component that is already put in place and

used already by costumer

C. Warranty agreements

D. Urgency to solve problems-costumer satisfaction is directly related to

respond immediately go problems

3. Preventive quality in strategic component

These are the critical parts in the component that require more extensive
quality assurance.

It must go through a series of studies and test along the following:

A. The Supplier must participate in the component design

B. High level of integrated research and development for complex products

C. The parts are expensive and must pass series of test

D. Longer lead time to develop

E. It requires extensive testing before production

F. The parts require legal implication and critical characteristics

The complexity of the above components parts requires part quality

assurance (PQA). The following formal process of documentation goes
through the process of validation by the buyer.

A. Review the technical specifications

B. Validate the reliability of the design characteristics

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C. Develop and document a quality assurance plan

D. Identify the need for a tooling plan

E. Perform a pre-process audit of the component

F. Perform a legal and government conformity audit

G. Perform a packaging analysis and plan

H. Project the effect of process mode failure

I. Develop a statistical process control plan

J. Perform a production test plan

K. Perform a process audit

L. Develop a parts handling plan

The above requirements must be complied before any supply agreement will
be signed by the buyer and seller. The parts quality assurance (PQA) is
finalized only after final testing of the component parts and verified as to its
quality compliance and performance.

The dimensions of quality

1. Functionality

Refers to the core feature and characteristic of product

2. Reliability

Attribute of quality must have the specified working hours or time limits as
to its durability of use.

3. Usability

A product should be used easily by the costumer with a little training through
simple instructions which are usually included in brochures

4. Maintainability

Is the condition by which the product van be maintained in the original

condition when it is needs repair a rework

5. Effeciency

Is the ratio of output to input.

6. Conformance to standards
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Is the conformanve to set standard of quality by the certified organization for
quality products like ISO 9000 and the industry standard for quality.

Involvement of supplier in quality developement

The development