MODULE-4

Sourcing and Pricing

By:

LAKSHMI NARAYANA REDDY.K

MODULE-4
Sourcing and Pricing. Sourcing In-house or Outsource 3rd and 4th PLs supplier scoring and assessment, selection design collaboration procurement process sourcing planning and analysis. Pricing and revenue management for multiple customers, perishable products, seasonal demand, bulk and spot contracts.

The Role of Sourcing in a Supply Chain

Sourcing is the set of business processes required to purchase goods and services. Purchasing or procurement is the process by which companies acquire raw materials, P&S other resources from suppliers to execute their operations. Sourcing processes include:
Supplier scoring and assessment Supplier selection and contract negotiation Design collaboration Procurement Sourcing planning and analysis

Supplier scoring and assessment

Supplier selection and contract negotiation

Design collaboration

Procurement

Design collaboration

Sourcing processes

1. Supplier Scoring and Assessment

Supplier performance should be compared on the basis of the suppliers impact on total cost. It is used to rate the suppliers performance. Many firms uses price has traditionally been the only dimension that supplier have been compared on. There are several other factors besides purchase price that influence total cost. In addition to the price the firm will consider the following factors:

Supplier Assessment Factors

Replenishment Lead Time OnOn-Time Performance Supply Flexibility Delivery Frequency / Minimum Lot Size Supply Quality Inbound Transportation Cost Pricing Terms Information Coordination Capability Design Collaboration Capability Exchange Rates, Taxes, Duties Supplier Viability

2. Supplier Selection- Auctions Selectionand Negotiations

It uses the O/P from supplier scoring & assessment to identify the appropriate suppliers. A supply contracts are negotiated with the suppliers. Supplier selection can be performed through competitive bids, reverse auctions, and direct negotiations. Supplier evaluation is based on total cost of using a supplier. A good contract should A/C for all factors that impact SC performance & should be designed to increase SC profits in a way that benefits both suppliers & buyers.

There are 4 concepts the manager designing a S C contracts

Contracts for Product Availability and Supply Chain Profits: Profits: Contracts to Coordinate Supply Chain Costs Contracts to Increase Agent Effort Contracts to Induce Performance Improvement: Improvement:

1.Contracts for Product Availability and Supply Chain Profits:

Many shortcomings in supply chain performance occur because the buyer and supplier are separate organizations and each tries to optimize its own profit. profit. Total supply chain profits might therefore be lower than if the supply chain coordinated actions to have a common objective of maximizing total supply chain profits. profits. An approach to dealing with this problem is to design a contract that encourages a buyer to purchase more and increase the level of product availability. availability. The supplier must share in some of the buyers demand uncertainty. uncertainty.

Buyback Contracts
Allows a retailer to return unsold inventory up to a specified amount at an agreed upon price. price. Increases the optimal order quantity for the retailer, resulting in higher product availability and higher profits for both the retailer and the supplier. supplier. Most effective for products with low variable cost, such as music, software, books, magazines, and newspapers. newspapers. Downside is that buyback contract results in surplus inventory that must be disposed of, which increases supply chain costs. costs. Can also increase information distortion through the supply chain because the supply chain reacts to retail orders, not actual customer demand. demand.

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. sold. Decreases the cost per unit charged to the retailer, which effectively decreases the cost of overstocking. overstocking. Can result in supply chain information distortion, however, just as in the case of buyback contracts. contracts.

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 Increased overall supply chain profits if the supplier has flexible capacity Lower levels of information distortion than either buyback contracts or revenue sharing contracts

2. Contracts to Coordinate Supply Chain Costs

Differences in costs at the buyer and supplier can lead to decisions that increase total supply chain costs. costs. Example: Replenishment order size placed by the buyer. Example: buyer. The buyers EOQ does not take into account the suppliers costs. costs. A quantity discount contract may encourage the buyer to purchase a larger quantity (which would be lower costs for the supplier), which would result in lower total supply chain costs. costs. Quantity discounts lead to information distortion because of order batching. batching.

3. Contracts to Increase Agent Effort

There are many instances in a supply chain where an agent acts on the behalf of a principal and the agents actions affect the reward for the principal. principal. Example: A car dealer who sells the cars of a Example: manufacturer, as well as those of other manufacturers. manufacturers. Examples of contracts to increase agent effort include twotwo-part tariffs and threshold contracts. contracts. Threshold contracts increase information distortion. distortion. Threshold contracts : it can be used to counter double marginization and increase agents efforts in SC. SC.

4.Contracts to Induce Performance Improvement

A buyer may want performance improvement from a supplier who otherwise would have little incentive to do so. A shared savings contract provides the supplier with a fraction of the savings that result from the performance improvement. Particularly effective where the benefit from improvement accrues primarily to the buyer, but where the effort for the improvement comes primarily from the supplier.

 Contracts for Product Availability and Supply Chain Profits: Buyback Contracts: supplier returns unsold inventory upto a specified amount at an agreed upon price. Revenue-Sharing Contracts: in this buyer pays a minimal amount for each unit purchased from supplier but shares a fraction of revenue for each unit sold. Quantity Flexibility Contracts: it allows the buyers to modify the orders as demand visibility to increase closer to the point of sale. Contracts to Coordinate Supply Chain Costs Contracts to Increase Agent Effort: Threshold Contracts: it can be used to counter double marginization and increase agents efforts in SC. Contracts to Induce Performance Improvement: Shared savings Contracts: are effective in aligning supplier & buyer incentives.

3. Design Collaboration
It allows the suppliers & the manufacturer to work together when designing for the final product. product. 50-70 percent of spending at a manufacturer is through procurement. 50procurement. 80 percent of the cost of a purchased part is fixed in the design phase. 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. manufacturability. Manufacturers must become effective design coordinators throughout the supply chain. chain.

4. The Procurement Process

The process in which the supplier sends product in response to orders placed by the buyer. buyer. Goal is to enable orders to be placed and delivered on schedule at the lowest possible overall cost. cost. Two main categories of purchased goods: goods: Direct materials: components used to make finished goods materials: Indirect materials: goods used to support the operations of a firm materials: Differences between direct and indirect materials Focus for direct materials should be on improving coordination and visibility with supplier. supplier. Focus for indirect materials should be on decreasing the transaction cost for each order. order. Procurement for both should consolidate orders where possible to take advantage of economies of scale and quantity discounts. discounts.

5. Sourcing Planning and Analysis

A firm should periodically analyze its procurement spending and supplier performance and use this analysis as an input for future sourcing decisions. decisions. Procurement spending should be analyzed by part and supplier to ensure appropriate economies of scale. scale. Supplier performance analysis should be used to build a portfolio of suppliers with complementary strengths. strengths. Cheaper but lower performing suppliers should be used to supply base demand Higher performing but more expensive suppliers should be used to buffer against variation in demand and supply from the other source

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 use of auctions.

Making Sourcing Decisions in Practice

Use multifunction teams. Ensure appropriate coordination across regions and business units. Always evaluate the total cost of ownership. Build long-term relationships with key suppliers.

In house or Out source

There are many firms which perform logistical works on behalf of their customers such as transportation carriers or warehouse firms. firms. The modern trend in LSM is logistic outsourcing. outsourcing. There are 2 major examples: examples: 1. Third party logistics. logistics. 2. Fourth party logistics. logistics.

Third party logistics

3PLs are external suppliers that perform all or part of a companys logistics functions, including: including: Transportation Warehousing Distribution Financial services Terms contract logistics and outsourcing are sometimes used in place of 3PL. PL.

Why Use 3PL?

3PL Providers

Shippers Using More than Five 3PLs

Types of 3PL Providers Transportation-Based: Transportation-Based: Services extend beyond transportation to offer a comprehensive set of logistics offerings. offerings. Leveraged 3PLs use assets of other firms. firms. Non leveraged 3PLs use assets belonging solely to the parent firm. firm. Ryder, Schneider Logistics, FedEx Logistics, and UPS Logistics are examples of 3PLs. PLs. Warehouse/Distribution-Based: Warehouse/DistributionWarehouse/Distribution-Based: Warehouse/Distribution-Based Many, but not all, have former warehouse and/or distribution experience. experience. Transition to integrated logistics has been less complex than for the transportation based providers. providers. DSC Logistics, USCO, Exel, Caterpillar Logistics, and IBM are examples of warehouse/distribution-based 3PLs. warehouse/distributionPLs.

 Forwarder-Based: Essentially very independent middlemen extending forwarder roles. Non-asset owners that capably provide a wide range of logistics services. AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson, and the Hub Group are examples of forwarder-based 3PLs. Financial-Based: Provide freight payment and auditing, cost accounting and control, and tools for monitoring, booking, tracking, tracing, and managing inventory. Cass Information Systems, CTC, GE Information Services, and Fleet Boston are examples of financial-based 3PLs. Information-Based: Significant growth and development in this alternative category of Internet-based, business-to-business, electronic markets for transportation and logistics services. Transplace and Nistevo are examples of information-based 3PLs

Fourth party logistics

A fourth-party logistics provider integrates the resources of fourthproducers, retailers and third-party logistics providers in view to thirdbuild a system-wide improvement in supply chain management. systemmanagement. They are non-asset based meaning that they mainly provide nonorganizational expertise. expertise. It is an emerging trend in SCM in which a customer firm outsource the entire set of logistics & SC activities to a single logistics provider firm which will act as a single point of contact for all their vendors, service providers & customers with regards to any logistics need in order to provide a overall maximum benefits. benefits. It is SC integrator that assembles & manages the resources, capabilities & technology of its own organization with those of complementary service providers to deliver a comprehensive SC solution. solution.

Pricing and Revenue Management in the Supply Chain

The Role of Revenue Management in the Supply Chain

Revenue management is the use of pricing to increase the profit generated from a limited supply of supply chain assets. assets. Supply assets exist in two forms: capacity and inventory. forms: inventory. 1. Capacity assets: SC exists for production, transportation & assets: storage. storage. 2. Inventory Assets: Exists throughout the SC & are carried try Assets: to improve product availability. availability. Revenue management may also be defined as the use of differential pricing based on customer segment, time of use, and product or capacity availability to increase supply chain profits. profits. Most common example is probably in airline pricing. pricing.

 R M adjusts the pricing & available supply of assets to maximize profits. profits. R M can be a powerful tool for every owner of assets in a SC. SC. R M has its own scope: scope: The value of the product varies in different market segments (Example: airline seats). (Example: seats). The product is highly perishable or product waste occurs (Example: (Example: fashion and seasonal apparel). apparel). Demand has seasonal and other peaks (Example: (Example: products ordered at Amazon.com). Amazon.com). The product is sold both in bulk and on the spot market (Example: (Example: owner of warehouse who can decide whether to lease the entire warehouse through long-term contracts or longsave a portion of the warehouse for use in the spot market). market).

Revenue Management for Multiple Customer Segments

If a supplier serves multiple customer segments with a fixed asset, the supplier can improve revenues by setting different prices for each segment. Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price. The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment equals the price of the lower price segment.

 To successfully use of RM when serving multiple customer segments , a firm must use the following tactics: 1. Price based on the value assigned by each segment. 2. Use different prices for each segment. 3. Forecast at the segment level.

Revenue Management for Perishable Assets

Any asset that loses value over time is perishable. perishable. Examples: high-tech products such as computers and Examples: highcell phones, high fashion apparel, underutilized capacity, fruits and vegetables. vegetables. Two basic approaches: approaches: Vary price over time to maximize expected revenue. revenue. Overbook sales of the asset to account for cancellations. cancellations.

 Overbooking or overselling of a supply chain asset is valuable if order cancellations occur and the asset is perishable. perishable. The level of overbooking is based on the tradetradeoff between the cost of wasting the asset if too many cancellations lead to unused assets and the cost of arranging a backup if too few cancellations lead to committed orders being larger than the available capacity. capacity.

Revenue Management for Seasonal Demand

Seasonal peaks of demand are common in many supply chains. chains. Examples: Most retailers achieve a large portion Examples: of total annual demand in December (Amazon.com). (Amazon.com). Off-peak discounting can shift demand from peak Offto non-peak periods. nonperiods. Charge higher price during peak periods and a lower price during off-peak periods. offperiods.

 Most of firms face a market where some customers purchase in bilk at a discount & others buy single units / small lots at a higher price. price. Most consumers of production, warehousing, and transportation assets in a supply chain face the problem of constructing a portfolio of long-term bulk contracts and shortlongshortterm spot market contracts. contracts. The basic decision is the size of the bulk contract. contract. The fundamental trade-off is between wasting a portion of the tradelowlow-cost bulk contract and paying more for the asset on the spot market. market. Given that both the spot market price and the purchasers need for the asset are uncertain. uncertain.

Revenue Management for Bulk and Spot Customers

Using Revenue Management in Practice

Evaluate your market carefully Quantify the benefits of revenue management Implement a forecasting process Apply optimization to obtain the revenue management decision Involve both sales and operations Understand and inform the customer Integrate supply planning with revenue management