Unit-V

Sourcing and transportation decisions

in the supply chain

The role of sourcing in a supply chain

Sourcing is the set of business processes required to purchase
goods and services. The process includes:
Supplier scoring and assessment
Supplier selection and contract negotiation
Design collaboration
Procurement
Sourcing planning and analysis

Benefits of effective sourcing decisions

Better economies of scale can be achieved if orders are aggregated
More efficient procurement transactions can significantly reduce the

overall cost of purchasing

Design collaboration can result in products that are easier to manufacture

and distribute, resulting in lower overall costs

Good procurement processes can facilitate coordination with suppliers
Appropriate supplier contracts can allow for the sharing of risk
Firms can achieve a lower purchase price by increasing competition

through the auctions

3

Supplier scoring and assessment

Supplier performance should be compared on the basis of the suppliers impact
on total cost which is based on the following factors:

Replenishment lead time

Pricing terms

On-time performance

Information coordination capability

Supply flexibility

Design collaboration capability

Delivery frequency/minimum lot size

Exchange rates, taxes, duties

Supply quality

Supplier viability

Inbound transportation cost

Supplier selection and contract negotiation

Supplier selection can be performed through competitive bidding process
or through direct negotiations
Contracts for product availability and supply chain profits:
Buyback contracts:
Allows a retailer to return unsold inventory up to a specified amount at
an agreed upon price
Increases the optimal order quantity for the retailer, resulting in higher
product availability and profits for both the retailer and the supplier
5

Continued..
Revenue-sharing contracts:
The buyer pays a minimal amount for each unit purchased from the
supplier but shares a fraction of the revenue for each unit sold
Decreases the cost per unit charged to the retailer, which effectively
decreases the cost of overstocking
Quantity flexibility contracts:
Allows the buyer to modify the order (within limits) as demand
visibility increases closer to the point of sale
Better matching of supply and demand

Design collaboration
50-70 percent of spending at a manufacturer is through procurement
80 percent of the cost of a purchased part is fixed in the design
phase
Design collaboration with suppliers can result in reduced cost,
improved quality and decreased time to market
Important

to

employ

design

for

logistics,

design

for

manufacturability

The procurement process

The process in which the supplier sends product in response to orders

placed by the buyer

Goal is to enable orders to be placed and delivered on schedule at the

lowest possible overall cost

Focus for direct materials should be on improving coordination and

visibility with supplier

Focus for indirect materials should be on decreasing the transaction cost

for each order

Procurement for both should consolidate orders where possible to take

advantage of economies of scale and quantity discounts
8

Sourcing planning and analysis

Periodical analysis of procurement spending and supplier
performance
Using the inputs from above for future sourcing decisions
Procurement spending should be analyzed by part and
supplier to ensure appropriate economies of scale
Supplier performance analysis should be used to build a
portfolio of suppliers with complementary strengths
9

Transportation in supply chain

Modes of transportation (domestic):
Road (about 60 percent)
Rail (about 25 percent)
Sea
Air
Pipeline
Ropeways (negligible)

Note: Sea, air and pipeline share about 15 percent of the total material
transportation in the supply chain.
10

Factors influencing transportation cost

Transportation cost per unit load:
Volume (higher volume will reduce per unit cost of transportation)
Distance (higher the distance, higher the cost)
Product density (weight per unit volume)
Product shape (odd sized products may need towing)
Product handling (specific requirement for loading and unloading)
Product type/nature (insulated/air conditioned etc.)
Market dynamics (demand and supply conditions)
11

Intermodal/multimodal transportations
Use of more than one mode of transportation to move a shipment to its
destination e.g. rail/truck, water/rail/truck or water/truck etc.
Grown considerably with increased use of containers
Increased global trade has also increased use of intermodal transportation
More convenient for shippers (one entity provides the complete service)
Key issue involves the exchange of information to facilitate transfer
between different transport modes

12

Transportation networks
Direct shipping network
Direct shipping with milk runs
All shipments via central distribution centre
Shipping via distribution centre using milk runs
Tailored network

13

Trade-offs in transportation design

Transportation and inventory cost trade-off
Choice of transportation mode
Inventory aggregation
Transportation cost and responsiveness trade-off

14

Transportation modes comparison

Cycle
inventory

Safety
inventory

In-transit
cost

Transportation
time

Transportation
cost

Rail

Truck load
(TL)

Less than truck

load (LTL)

Package carrier

Air

Water

Mode

1: worst, 6: best

15

Transportation cost and responsiveness

Temporal aggregation is the process of combining orders

across time
Temporal aggregation reduces transportation cost because it

results in larger shipments and reduces variation in shipment

sizes
However,

temporal

aggregation

reduces

customer

responsiveness
16

Trade-off between transportation

cost and response time
2 day response time
Qty shipped
Cost
(tons)
(INR)

3 day response time

Qty shipped
Cost
(tons)
(INR)

Day

Demand
(tons)

492

492

549.2

499

499

549.9

991

252

252

525.2

332

332

533.2

584

124

124

512.4

404

404

540.4

528

195

195

519.5

214

214

521.4

409

339

339

533.9

10

245

245

524.5

584

11

396

396

539.6

12

418

418

541.8

814

13

456

456

545.6

14

126

126

512.6

582

4 day response time

Qty shipped
Cost
(tons)
(INR)
0

599.1

0
1243

558.4

624.3

0
0

552.8

860

586

0
540.9

0
748

558.4

574.8

0
0

581.4

1059

605.9

0
558.2

582

17

558.2

Risk management in transportation

Three main risks in transportation are:
Delayed shipment
Disruptions
Hazardous material
Risk mitigation strategies:
Decrease the probability of disruptions
Alternative routings
Proper packaging and containerization
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Making transportation decisions

Align transportation strategy with competitive strategy
(e.g., trade-off between responsiveness and cost)
Consider both in-house and outsourced transportation
Use

of

technology

to

improve

transportation

performance
Design flexibility into transportation network

19