Chapter Strategic Sourcing for Successful SCM LEARNING OBJECTIVES You should be able to – • Describe the difference between purchasing and strategic sourcing • Describe how strategic sourcing plans are developed and implemented • Define and describe the terms green sourcing, VMI, JIT II, in-sourcing, co-sourcing, and co-managed inventories • Describe sourcing’s role in managing key supplier relationships MBA Nguyen Phi Hoang©2015_SCM LEARNING OBJECTIVES (Continued) You should be able to – • Describe the performance criteria used in assessing suppliers • Describe how strategic supplier relationships can impact the firm • Describe how a reverse auction/tendering works • Understand the importance of sharing the benefits of strategic partnerships • Understand the strategic role played by the purchasing function in developing & improving the supply chain MBA Nguyen Phi Hoangâ2015_SCM CHAPTER OUTLINE Introduction • • • Ethical and Sustainable Sourcing Developing Ethical and Sustainable Sourcing Strategies Supply Base Rationalization Programs Ethical and Sustainable Supplier Certification Programs Outsourcing Products & Services Early Supplier Involvement Strategic Alliance Development MBA Nguyen Phi Hoang©2015_SCM CHAPTER OUTLINE • • • • (Continued) Use of e-Procurement Systems Rewarding Supplier Performance Benchmarking Successful Sourcing Practices Using Third-Party Supply Chain Management Services • Assessing & Improving the Firm’s Sourcing Function MBA Nguyen Phi Hoang©2015_SCM Introduction Sourcing - all of firm’s activities used to manage external resources Strategic sourcing - managing the firm’s external resources to support firm’s long term goals Drivers/ Key aims of Strategic Sourcing  Reduce costs & delivery cycle times  Improve quality & long-term financial performance  Focus on ethical and sustainable sourcing MBA Nguyen Phi Hoangâ2015_SCM Why need focus on ethics, sustainability or enviroment? Read article on page 102 and give conclusion MBA Nguyen Phi Hoang©2015_SCM Ethical and Sustainable Sourcing Strategies  Business Ethics is the application of ethical principles to business  Corporate Social Responsibility(CSR) is the practice of business ethics  Ethical Sourcing is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior MBA Nguyen Phi Hoang©2015_SCM Ethical and Sustainable Sourcing Strategies (Continued) Ethical Policies should include –  Determining where all purchased goods originated and the manner in which they were made  Knowledge of the suppliers’ workplace principles  Inclusion of ethics as a performance rating  Independent verification of vendor/seller compliance  Report of supplier compliance to stakeholders  Provision of detailed ethical sourcing expectations to suppliers MBA Nguyen Phi Hoang©2015_SCM Ethical and Sustainable Sourcing Strategies (Continued) Sustainable Sourcing  Green purchasing is aimed at ensuring products or materials meet environmental objectives e.g waste reduction, reuse and recycling  Sustainability is the ability to meet current needs of the supply chain without hindering/limit the ability to meet future needs in terms of economic, environmental, and social challenges  Considers worker safety, wages, working conditions, human rights MBA Nguyen Phi Hoang©2015_SCM 10 Supply Base Rationalization Programs Supply base rationalization (supply base reduction or supply base optimization) is often the initial supply chain management effort Buyer-supplier partnerships are easier with a rationalized supply base & result in –  Reduced purchase prices  Fewer supplier management problems  Closer & more frequent interaction between buyer & supplier  Greater levels of quality & delivery reliability MBA Nguyen Phi Hoang©2015_SCM 20 Strategic Alliance & Supplier Certification Programs Supplier certification programs are used to identify strategic supplier alliance candidates Firms use in-house formal certification programs, & most require ISO 9000 / 14000 or similar certifications as part of the certification process The use of ethical & environmental certification is increasing MBA Nguyen Phi Hoang©2015_SCM 21 Outsourcing Products and Services Outsourcing allows a firm to –      Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce management problems Improve manufacturing flexibility Risks associated with outsourcing, include –  Loss of control  Production decisions & intellectual property  Increased reliance on suppliers  Increased need for supplier management MBA Nguyen Phi Hoang©2015_SCM 22 Early Supplier Involvement Early supplier involvement (ESI) highly effective supply chain integrative techniques - Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniques These above activities are called value engineering which help the firm to reduce cost, improve quality & reduce new product development time MBA Nguyen Phi Hoang©2015_SCM 23 Early Supplier Involvement (Continued) Vendor managed inventory (VMI) – Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer From the buyer-firm’s perspective –  Supplier tracks inventories  Determines delivery schedules and order quantities  Buyer can take ownership at stocking location From the supplier’s perspective –  Avoids ill-advised customer orders  Supplier decides inventory set up & shipments  Opportunity for supplier to educate customers about other products MBA Nguyen Phi Hoang©2015_SCM 24 Strategic Alliance Development Alliance development, an extension of supplier development refers to increasing a key or strategic supplier’s capabilities   Supplier alliances result in better market penetration access to new technologies & knowledge, & higher return on investment   Alliance development eventually extends to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances MBA Nguyen Phi Hoang©2015_SCM 25 Negotiating Win-Win Strategic Alliance Agreements Collaborative negotiations (integrative negotiations) – Both sides work together to maximize the outcome or create a win-win result  Requires open discussions and a free-flow of information between parties Distributive negotiations – Refers to a process that leads to self-interested, one-sided outcome MBA Nguyen Phi Hoang©2015_SCM 26 Steps Negotiating Win-Win Strategic Alliance Agreements (Continued) Description Build preparation process Gain an understanding of both parties’ interests; brainstorm value-maximizing solutions; identify objective criteria to evaluate fairness of agreement Develop negotiation database Review previous negotiations to catalogue standards, practices, precedents, metrics, creative solutions used, and lessons learned Design Create an environment to work together to create a negotiation launch shared vocabulary, build working relationships, and map process out a shared decision-making process Institute feedback mechanism Create process to provide feedback to negotiating teams and capture lessons learned (Table 4.4) MBA Nguyen Phi Hoang©2015_SCM 27 Use of e-Procurement Systems Primary benefits of e-procurement include –  Cost savings  Frees-up time to concentrate on core business e-procurement systems – Concentrate large volumes of small purchases with a few suppliers, using e- catalogues, available to the organization’s users Reverse auctions – Pre-qualified suppliers enter Web site & at predesignated time & date, try to underbid competitors, monitoring bid prices until the session is over MBA Nguyen Phi Hoang©2015_SCM 28 Rewarding Supplier Performance Rewarding suppliers provides an incentive to surpass performance goals Punishment is a negative reward, may be to reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality Strategic supplier agreements can reward suppliers by allowing –     A share of the cost reductions More business and/or longer contracts Access to in-house training seminars & other resources Company & public recognition MBA Nguyen Phi Hoang©2015_SCM 29 Benchmarking Successful Sourcing Practices Benchmarking – Measuring what other businesses best and matching their performance is an effective approach to improving supply chain performance Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal & informal Resources for learning about & implementing sourcing practices –  The Center for Advanced Purchasing Studies  Supply-Chain Council MBA Nguyen Phi Hoang©2015_SCM 30 Using Third-Party Supply Chain Management Services Third-party logistics (3PL) A growing industry that involves managing a firm’s sourcing or materials &/or product distribution responsibilities  3PL providers charge a fee for services for an estimated savings of 10 to 20% of total logistics costs; benefits include improved service, quality, & profits for their clients Vendor-managed inventory (VMI) services – One of the more popular roles of 3PL Lead logistics provider (LLP), aka 4PL – A primary 3PL provider; one that oversees other 3PL’s MBA Nguyen Phi Hoang©2015_SCM 31 Assessing & Improving the Firm’s Purchasing Function The purchasing function is one of the most value-enhancing functions in any organization  It is preferable to periodically monitor the purchasing function’s performance against set standards, goals, and/or industry benchmarks  Surveys or audits can be administered as selfassessments among purchasing staff as part of the annual evaluation process MBA Nguyen Phi Hoang©2015_SCM 32 Assessing & Improving Firm’s Purchasing Function Skill set requirements of purchasing professionals (Continued) have been changing Purchasing personnel must today exhibit world-class skills such as – Interpersonal communication Ability to make decisions Ability to work in teams Analytical skills Negotiation skills MBA Nguyen Phi Hoang©2015_SCM Customer focus Ability to manage change Influencing & persuasion skills Strategic skills 10 Understanding business conditions 33 Assessing & Improving Firm’s Purchasing Function Assessment criteria include – (Continued) Participating in and leading multifunctional teams Participate in value engineering efforts Optimize supply base Create ESI initiatives Utilize e-procurement MBA Nguyen Phi Hoang©2015_SCM Further supplier integration Contribute to new product development Improve time to market Initiate supplier cost reduction programs 10 Creation of strategic alliances 34 ... purchasing and strategic sourcing • Describe how strategic sourcing plans are developed and implemented • Define and describe the terms green sourcing, VMI, JIT II, in -sourcing, co -sourcing, and... Assessing & Improving the Firm’s Sourcing Function MBA Nguyen Phi Hoang©2015_SCM Introduction Sourcing - all of firm’s activities used to manage external resources Strategic sourcing - managing the firm’s... Sustainable Sourcing Strategies Supply Base Rationalization Programs Ethical and Sustainable Supplier Certification Programs Outsourcing Products & Services Early Supplier Involvement Strategic