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Chapter Objectives
Be able to:
Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other. Perform a simple total cost analysis. Explain what a sourcing strategy is, and show how portfolio analysis can be used to identify the appropriate sourcing strategy for a particular good or service. Show how multicriteria decision models can be used to evaluate suppliers, and interpret the results. Discuss some of the longer-term trends in supply management and why they are important.
Introduction
The sourcing decision Sourcing strategies Supplier evaluation Trends in supply management
Focus
Sourcing decisions and purchasing activities serve to link a company with its supply chain partners Sourcing decisions
High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners
Outsourcing
The use of supply chain partners to provide products or services
Make-or-Buy Decision
Disadvantages
Possibility of choosing a bad supplier Loss of control over the process and core technologies Communication and coordination challenges Hollowing out of the corporation
Favors Insourcing
low
low low
Favors Outsourcing
high
high high
high
low
Indirect costs
Costs that are not tied directly to the level of operations or supply chain activity
Outsourcing
Price (from invoice) Freight costs
Indirect costs
Portfolio Analysis
High
Bottleneck
Critical
Routine
Low
Low
Leverage
High
Value Potential
Critical Quadrant
Critical to profitability and operations Few qualified sources of supply Large expenditures Design and quality critical Complex and/or rigid specification Strategy
Form partnerships with suppliers
Tactics
Increase role of selected suppliers
Actions
Heavy negotiation Supplier process management Prepare contingency plans Analyze market/competitions Use functional specifications
Bottleneck Quadrant
Complex specifications requiring complex manufacturing or service process Few alternate productions/sources of supply Big impact on operations/maintenance New technology or untested processes Strategy
Ensure supply continuity
Tactics
Decrease uniqueness of suppliers Manage supply
Actions
Widen specification Increase competition Develop new suppliers Medium-term contracts Attempt competitive bidding
Leverage Quadrant
High expenditures, commodity items Large marketplace capacity, ample inventories Many alternate products and services Many qualified sources of supply Market/price sensitive Strategy
Maximize commercial advantage
Tactics
Concentrate business Maintain competition
Actions
Promote competitive bidding Exploit market cycles/trends Procurement coordination Use industry standards Active sourcing
Routine Quadrant
Many alternative Strategy Simplify acquisition products and services process Many sources of Tactics supply Increase role of systems Low value, small Reduce buying effort individual transactions Actions Everyday use, Rationalize supplier base Automate requisitioning, unspecified items e.g., EDI, credit cards Anyone could buy it Stockless procurement
Minimize administration costs Little negotiating
Sourcing Strategies
Single sourcing
The buying firm depends on a single company for all or nearly all of an item or service
Multiple sourcing
The buying firm shares its business across multiple suppliers
Cross sourcing
Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part
Dual sourcing
Using two suppliers for the same purchased product or service
How do we evaluate alternatives when criteria include both quantitative measures (such as costs and on-time delivery performance) and qualitative factors (such as management stability and trustworthiness)?
The Process:
Assign weights to performance dimensions Rate the performance of each supplier with regard to each dimension Calculate the total score
Price
$4/unit
$5/unit
$2/unit
Quality
Delivery reliability
5% defects
95% on time
1% defects
80% on time
10% defects
60% on time
WQuality = 0.4
WDelivery = 0.3
3 = average
2 = fair 1 = poor
Price
Quality
Delivery reliability
3
4
5
2
1
1
Global Sourcing
Supply Chain Disruptions Supply Chain Capacity Transportation Costs
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