Future Development in Global Sourcing and Logistics 26.09.2011 - 27.09.2011 Professor Dr. Dr. h.c. Ulli Arnold University of Stuttgart ulli.arnold@bwi.uni-stuttgart.de - PowerPoint PPT Presentation

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Future Development in Global Sourcing and Logistics 26.09.2011 - 27.09.2011 Professor Dr. Dr. h.c. Ulli Arnold University of Stuttgart ulli.arnold@bwi.uni-stuttgart.de


Future Development in Global Sourcing and Logistics 26.09.2011 - 27.09.2011 Professor Dr. Dr. h.c. Ulli Arnold University of Stuttgart ulli.arnold_at_bwi.uni-stuttgart.de – PowerPoint PPT presentation

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Title: Future Development in Global Sourcing and Logistics 26.09.2011 - 27.09.2011 Professor Dr. Dr. h.c. Ulli Arnold University of Stuttgart ulli.arnold@bwi.uni-stuttgart.de

Future Development in Global Sourcing and
Logistics26.09.2011 - 27.09.2011Professor
Dr. Dr. h.c. Ulli ArnoldUniversity of
  • Agenda
  • The Concept of Global Sourcing
  • Barriers to Worldwide Sourcing
  • Organisational Buying Behaviour
  • Global Sourcing Analysis
  • Organisation of Global Sourcing
  • Sourcing Strategies
  • Vertical and Horizontal Cooperation
  • Sourcing Processes
  • Controlling of Procurement
  • Logistics as an Enabler
  • Supply Chain Management

Chapter 1
  • The Concept of Global Sourcing

1. Global mega trends
Information technologies and innovations will
become a key success factor
Demographic change will be highly
impact availability of skilled and also low
cost labor
Fundamental market changes will be more frequent
and access to raw materials will become more
Demand in traditional industries (and mature
markets) will slow down, but
developing markets will experience strong growth
1. Structure and development of the world trade
2000 - 2006
(Source WTO, International Trade Statistics 2007)
1. Structure and development of the world trade
World trade flows
Selected intra- and inter-regional merchandise
trade flows, 2006
(Source WTO, International Trade Statistics
1. Structure and development of the world trade
World exports of goods (detailed), 2000-2006
Logarithmic scale
(Source WTO, International Trade Statistics 2007)
1. Structure and development of the world trade
World exports of goods and commercial services,
World commercial services exports by category,
2000 and 2006
World exports of goods and commercial services,
(Source WTO, International Trade Statistics 2007)
1. Sourcing Tasks in International Business
Domestic Production
Overseas Production
Indirect Imports
Direct Imports
No Direct Investment
Direct Investment
Joint Venture
Own Production
International Production Coordination
Management Contract (Sourcing)
Contract Production (Supply)
Licensing (Sourcing Consulting)
1. Global Sourcing - Definition
  • What is Global Sourcing?
  • The business process of identifying, evaluating,
    negotiating and configuring
  • supply chains across multiple suppliers and
  • Common reasons for Global Sourcing
  • Reducing overall cost structure
  • Availability of new technology and capacity.
    Often domestic suppliers lack capacity and / or
    are not making the necessary investments to stay
  • Establishing alternative sources of supply-
    reduced risk
  • Access to new designs or specialized intellectual
  • Superior quality. This is typically due to
    supplier investment in technology and capacity to
    attract global businesses

Chapter 2
  • Barriers to Worldwide Sourcing

2. Barriers to World Wide Sourcing
  • Economical barriers
  • e.g. Tarriffs, duties, hidden costs
  • Political conditions
  • e.g. Legal system, political stability,
    protectionism etc.
  • Cultural conditions
  • e.g. flexibility, values, openness etc.

2. Barriers to World Wide Sourcing (economical)
  • total cost in international purchasing is also
  • landed costs
  • international purchasing may include many
  • cost components compared with domestic

Packaging Transportation Duties/ Tarifs Insurance premiums Payment terms Fees and commissions Port terminal and handling fees Custom broker fees Taxes Communication costs Payment and currency fees Inventory carring costs
2. Barriers to World Wide Sourcing (political)
Trade and currency policy
State/ Suprastates foreign trade regimes
  • Contractual trade barrier Duty, dues
  • fiscal policy to suppress foreign provider
  • Non-contractual barriers
  • - building specifications - national safety
  • - terms of use - ecological demand
  • Currency control
  • Contrary complete convertibility of the
  • Laws/restrictions
  • - Kriegswaffenkontrollgesetz - Narcotics law
  • Industrial policy
  • - grants - export promotions
  • - risk taking

2. Barriers to World Wide Sourcing (political)
Free trade zones ordered by regions
(members)  Africa  1. Communaute Economique de
lAfrique de lQuest (7) 2. Communaute
Economique de Pays des Grans Lacs (3) 3.
Economic Community of West African States
(16) 4. Indian Ocean Commission (5) 5. Mano
River Union (3) 6. Preferential Trade Area for
Eastern and Southern Africa (18) 7. Southern
African Customs Union (4) 8. Southern African
Development Coordination Conference (10) 9.
Union Douaniere et Economique de lAfrique
Centrale (6)   Asia und Pacific 10.
Australia-New Zealand Closer Economic Relations
Trade Agreement (2) 11. Association of South
Asian Nations (ASEAN) (5) 12. Asiatic Pacific
Economic Cooperation (APEC) (18)  
Middle East 13. The Arab Common Market (7) 14.
Economic Cooperation Organization (3) 15. Gulf
Cooperation Council (6) North and South
america 16. North America Free Trade Area
(NAFTA) (3) 17. Andean Pact (5) 18. Central
American Common Market (5) 19. Caribbean
Community (13) 20. Mercosur (4)
2. Barriers to World Wide Sourcing (political)
Free trade zones in Africa
(Source unctad.org)
2. Barriers to World Wide Sourcing (cultural)
Transparency International Corruption
Perception Index 2009 (1)
2. Barriers to World Wide Sourcing (cultural)
Transparency International Corruption
Perception Index 2009 (2)
The Corruption Perception Index(CPI) is published
since 1995. In the CPI every country is
classified for their degree of corruption,
percieved by the governement and civil
service. The CPI is based on several surveys
and research from different independent
institutions. (Source
Chapter 3
  • Organisational Buying Behaviour

3. Organisational Buying Behaviour
Characteristics of the procuring organization
Purchase type
Organizational procurement process
Buying Center/ Buying Network
Selling Center/ Selling Network
Selling Center/ Selling Network
3. Organisational Buying Behaviour
  • Multi-personality
  • Problem-solving and decision-making process
  • Active information behavior
  • Intensive personal interactions
  • Organizational purchasing behavior takes
    place in a multi-personal problem-solving and
    decision-making process that is characterized
    by interactive information and behavior
    through frequent interactions.

3. Buying Center Concepts
  • Buying-Center
  • Theoretical summary of the decision making unit
  • The idea of the Buying-Center
  • Problem-oriented group of interacting members
    within an organisation, the group is established
    for purchasing an industrial good.
  • The Buying-Center is often institutionally
    established in investement comissions
  • Problem for suppliers Who is involved at which
    time and with which part in decisions
    (identification according to persons/ roles /
  • The range (number of participants) and the
    structure cannot be defined precisely.
  • Marketingimplication for the provider Analysing
    the range and structure of the Buying-Center.

Source Backhaus/Voeth, 2007, S. 46-75
3. Buying Center Concept (Webster/Wind)
Purchase decision
3. Buying Center Concept (Extension according to
  • The rolemodel is widened by Bonoma with the role
    of an initiator
  • Wittes promoter-/ opponent-model
  • Subject- and powerpromoter
  • Subject- and poweropponent
  • Promoter-Team

3. Structure of power and behaviour in
Handicap and delay decision processes Differentia
tion into Power opponents Knowledge opponents
  • Promote and influence the purchasing process
  • Differentaiotion into
  • Subject promoters
  • Power promoters

Decision behaviour
Information behaviour
Risk behaviour steers decision behaviour 1.
Decision oriented 2. Fact oriented 3. Security
  • Types of information serach behaviour
  • literal-scientifical
  • Objective-evaluative
  • Spontaneous/ passive
  • Types of information treatment
  • Facts-reactor
  • Image-reactor
  • Neutral reactor

3. The promoters and opponnents model
Sources of power
  • High hierarchic position
  • Competence of experts
  • Organisational skills
  • Internal organisational potentials of
  • Provides organisational resources
  • Defines goals
  • Grants incentives
  • Sanctions actors
  • Blocks opponents
  • Evaluates new und complex problems
  • Evaluates und develops solutions
  • Realises solutions
  • Initiates and promotes specific subject didactic
  • Collects, filters, translates and interprets
    informations und forwards them to according
  • Promotes communication relationship und
    coalitions among actors
  • Will barriers
  • Hierarchy barrierrs
  • Subject oriented skill barriers
  • Organisational and administrative barriers

Power promoter
Subject promoter
Process promoter
Chapter 4
  • Global Sourcing Analysis

4. Selection of sourcing countries
Portfolio approach
Market attractiveness
All considered markets are being evaluated for
their market attractiveness and market barriers.
Afterwards a matrix-structure is beeing
set-up. Based on that structure four market
types can be differentiated.
Target markets
Promising markets
Occasional markets
No Go markets
Market barriers
(Source Backhaus et al., 2003, S. 124-125)
4. Selection of sourcing countries
Portfolio approach
(Source Albaum/ Duerr/ Strandskov, 2005, S. 188)
4. Selection of sourcing countries
BERI-Index (1)
? Business Environment Risk Information (BERI)
  • Established1966 Headquarters in Friday Harbor,
    State of Washington, U.S.A
  • Evaluates country specific risks in a
    multidimensional model
  • One year and five year forecast
  • Examines 50 countries
  • Two simultaneous panels examining political and
    economic conditions

(Source www.beri.com, 2010)
4. Selection of sourcing countries
BERI-Index (2)
Final Evaluation consists of the aggregation of
three subindizes
ORI Operation Risk Index
PRI Political Risk Index
R-Factor Remittance Repatriation Factor
(Source www.beri.com/brs.asp, 2010)
Chapter 5
  • Organisation of Global Sourcing

5. Centralization vs. decentralization
  • Structural alternatives in an overview
  • Realizing supply economies of scale, economies of
  • economies of information

Degree of centralization
centralized structure
hierarchical coordination
supply economies of scale
supply economies of process and information
mix of centralized and decentralized (lagrest
volume centralized)
mix of centralized and decentralized (lagrest
volume decentralized)
hybrid coordination
decentralized structure
market coordination
Homogeneity of demand
5. International Purchasing Offices
  • What do International Purchasing Offices (IPOs)
    do to support
  • international purchasing
  • Identify foreign suppliers
  • Solicit quotes
  • Expedite and trace shipments
  • Negotiate supply contracts
  • Obtain product samples
  • Manage technical problems
  • Represent the buying firm to the suppliers
  • Manage countertrade
  • Perform site visits

5. Determinants of the International Purchasing
System (IPS)
Level of IPS
Extent of International Supply Base/Program
Value-Adding Services Provided by International
Worldwide Information Systems
Capabilities of Purchasing Personnel
5. Structural Relationship in a Strategic Network
Ultimate Customers
Distributor Partners
Logistic Partners
Sourcing Firm
Logistics Partners
Supplier Partners
Supplier Suppliers
5. Structure of a virtual organization
Virtual Organization
5. Lead Buyer Strategy Example BASF
Lead buyer system for Product Focus Groups
  • Lead Buyer coordinates product / product group
  • Supported by Regional Buyers
  • Each product / product group with dedicated

Lead Buyer System
(Source Britt, 2011)
5. Procurement Hubs Example BASF
Procurement hubs for non-focus products
  • Decentralized / delegated products
  • Local demand
  • Local hub buyer responsible for procurement

Procurement Hubs
(Source Britt, 2011)
Chapter 6
Sourcing Strategies
6. Sourcing Strategies Tasks of Procurement
(Source Arnold 1997)
6. Sourcing Strategies Sourcing-Toolbox
Supply Strategy as a Combination of Sourcing
(Source Arnold 1997)
6. Sourcing Strategies
Different origins of specificity(see Williamson
  • site specificity
  • physical asset specificity
  • human asset specificity
  • dedicated asset specificity
  • brand name specificity
  • time specificity
  • .
  • information specificity (UA)
  • Process specificity (release process including
    quality management)
  • selected supplier specificity / relationship
    related specificity

Input specificity
6. Sourcing Strategies
Transaction costs consist of
  • Coordinating costs
  • Control costs
  • Opportunity costs

ex ante transaction costs
ex post transaction costs
Transaction costs define different governance
modes (between markets, hierarchy and hybrid
forms). Specificity and strategic value are the
main factors which define the characteristic of a
6. Sourcing Strategies
How can be achieved completeness of contracts
between buyer and supplier?
explanation by agency theory
Complete means All possible elements which
influence the relationship between benefits and
costs are clearly defined and operationalized.
  • Information problems cause
  • Ex ante
  • Hidden characteristics
  • Problem the well performing suppliers will be
    ignored (? adverse selection)
  • B. Ex post
  • hidden action moral hazard
  • hidden information
  • hidden intention
  • hold up

6. Sourcing Strategies
  • How to solve information problems?
  • signalling (suppliers activity)(e.g. open book
  • screening (buyers activity)(e.g. auditing)
  • self selection (offering hidden infromation by
    choosing specific contract modalities)
  • incentive driven contract elements to stimulate
    convergence of interests

6. Sourcing Strategies
(Source Krause/Handfield, 2000)
6. Sourcing Strategies
(Source Krause/Handfield, 2000)
6. Sourcing Strategies
Development of a World Class Supply Base
  • Identify, assess and rationalize the supplier
  • Objective Create a pool of potentially capable
  • 1st step Identify strategic global supply chain
  • - end customers requirements
  • - product development targets
  • - improvement of market position and
    competitiveness in
  • product lines and market areas.
  • All these requirements directed to supplier
    potentials and abilities are
  • steered by the general sourcing objectives like
  • cost reduction
  • quality / value improvement
  • technology road maps
  • business expansion plans.

(Source Krause/Handfield, 2000)
6. Sourcing Strategies
Development of a World Class Supply Base
2nd step Search for competitive
suppliers. 3rd step Establish controlling
system for global sourcing activities -
performance metrics - supplier assessment
model - tracking system for supplier
performance - reporting of total cost of
ownership figures establish immediate
feedback to internal customers and
suppliers. 4th step Supplier base fit
Eliminate suppliers which are not able to fulfil
companys requirements identify already fully
capable suppliers identify suppliers which can
be developed in the future.
(Source Krause/Handfield, 2000)
6. Sourcing Strategies
Development of a World Class Supply Base
Problem solving development Objective
Suppliers meet all current requirements of
manufacturing and other
business activities. 5th step On site visits to
assess capabilities and potentials of suppliers
by cross-functional teams - technological
assessment - suppliers risk assessment -
environmental risk assessment. 6th step
Activities to eliminate suppliers deficiencies -
by technical support - by management support -
by financial support.
(Source Krause/Handfield, 2000)
6. Sourcing Strategies
Development of a World Class Supply Base
Proactive development Objective Self-reliant
global supply base with ability for continuous
improvement. 7th step Establish open
relationship through feedback and information
sharing establish appropriate communication
culture for mutual understanding provide
efficient IT-systems. 8th step Systematic
supplier development - direct involvement of
supplier avoid agency problems - incentives and
rewards - warnings and penalties Maintain
efforts and activities to reach self-reliance of
(Source Krause/Handfield, 2000)
6. Sourcing Strategies
Development of a World Class Supply Base
Integrative development Objective Globally
aligned supplier network. 9th step Supplier
integration in new product/process development -
share business plan information and technology
road maps - integrate staff members, employees
of suppliers (and vice versa) 10th step
Establish performance improvement in second tier
suppliers realize concept of supply chain
management upstream. 11th step Establish
integrated supplier network - supplier becomes
responsible for supplying multiple global
company sites - develop benefits by horizontal
extension of supplier network.
(Source Krause/Handfield, 2000)
6. Calling a Change in the Outsourcing Market
In the Real World, Outsourcing Frequently Fails
to Deliver its Promise
6. Outsourcing what is it?
  • Do what you can do best outsource the rest
  • Outside Resource Using
  • Strategic Approach
  • Focusing on core competences (lean)
  • resources view
  • Using of already available skills and
    capabilities on markets
  • market view
  • Outsourcing Offshoring Make or Buy

6. Potential Advantages by Outsourcing
? scale
External supplier can bundle, specialize, balance
? scope
Outsourcing-Partner can provide an access to
new/other markets
? technology expertise
Outsourcing Partner can invest in more efficient
technologies faster, more intense
6. Advantages and Disadvantages of Outsourcing
Advantages Disadvantages
Freeing up of cash investments can be concentrated on core activities Increased dependence on suppliers
Optimal usage of knowledge, equipment and experience of third party Continuous follow-up and monitoring of the supplier relationship necessary
Increased flexibility fluctuations in the workload can more easily be absorbed Risks of communication and organizational problems during the transfer of activities to a third party
Outsourcing leads to easier and more focused primary processes in the organization Risks of leakage of confidential information
Input through an independent partys point of view which reduces the risks of introvert short-sightedness in the organization Performance incentives and penalties
Risk of losing essential strategic knowledge
6. Aims of Outsourcing
Fixe Kosten Gemeinkosten Variable Kosten
Splitting der Be-darfe (Spot Buys) Bündelung
lang-fristige Partnerschaft
Fixed Costs Indirect Costs Variable Costs
Direct Costs
Splitting of Requirements (Spot Buys) Bundling
long-term Partnership
Complexity of Market requirements Variable
Costs Direct Costs
InternalCharging External Payments
Determinated Requirements Openness of
Performance Profiles
6. Possible Results
  • Effect - Relationships

  • Positive Effects, e.g.
  • Lower costs for knowledge
  • Extension of the competence profile
  • Deepening of the competence profile
  • Concentration on core activities
  • Organizational development (restructuring
  • Negative Effects, e.g.
  • Loss of competence
  • Decrease of performance quality
  • Loss of know-how- bearer
  • Increase of total costs for knowledge
  • Publication of confidential information

6. Possible Results
  • Impact of a depth of added value change by in-
  • respectively outsourcing (traditional make or
    buy) on
  • Level of the purchasing policy, the supply
    management and the placing activities
  • Capital investment capital commitment
  • Number of employees employment, capacity
  • Processing competence
  • Quality
  • Amount and structure of costs
  • relation to fixed / variable costs
  • Production management flexibility
  • Negotiation potential to external service
  • Risk structures
  • Conclusion Changes intervene regularly in
    existing structures /
    processes (business restructuring / reengineering)

6. Competitive Comparison
  • Example of automobile industry
  • comparative study from WOMACK / JONES / ROOS of
  • (Japan USA West-Europe)
  • Japanese automobile-manufacturer are better,
  • ? lower depth of added value
  • ? better networking with supplier
  • therefore
  • - shorter product development cycles
  • - more intensive use of JIT-supply
  • - major market flexibility
  • - major internal flexibility

6. Development Process of Outsourcing
Outsourcing has progressed from involving only
peripheral business activities towards
encompassing more critical business activities
that contribute to competitive advantage.

Many outsourcing failure cases have
been a result of the misapplication of the
concept by practitioners. Mc Ivor, Ronan The
Outsourcing Process Cambridge 2005
Chapter 7
Vertical and Horizontal Cooperation
7. Supplier relationship as a connecting factor
between the supply market and the firm
supply market
3. contracting
phase out
2. selection
4. executing
  • demand
  • planning

new supplier
supply partner
5. evaluating
firm demand
6. controlling
9. organising
strategic plan
7. cost analysis
8. sourcing strategy
the firm
7. Vertical and Horizontal Cooperation
  • Definition of cooperation constitutional
  • Independence of the cooperation members is a
  • needed by law to distinguish it from a merger
  • Partners in the cooperation are two or more
  • The main interest of the cooperation is an ex
    ante matching of plans
  • or a coordination of single interests, mainly
    in one functional part
  • (e.g. purchasing)
  • The main goal of a cooperation is a better
    economic situation for the
  • cooperation partners, reached by a cooperative

7. Vertical and Horizontal Cooperation
Key Suppliers
System/Module Suppliers
Supplier Base (components, raw materials etc.)
Vertical Global Sourcing Cooperation (Supplier
Horizontal Global Sourcing Cooperation (Cooperativ
e Purchasing)
7. Vertical and Horizontal Cooperation
  • Vertical Cooperation supplier/seller-relationship
  • Modern sourcing concepts need cooperations
  • Cooperation reduces transaction costs
  • Horizontal Cooperation Cooperative Purchasing
  • Planning of horizontal supply cooperations
  • setting goals
  • finding partners the idea of a procurement fit

7. Fit Dimensions as Factors in Partner Selection
Partner Management
Funda- mentalFit
Strategic Fit
Cultural Fit
Logistics Fit
Funda- mentalFit
Strategic Fit
Cultural Fit
Funda- mentalFit
Strategic Fit
Logistics Fit
Cultural Fit
Funda- mentalFit
Strategic Fit
Logistics Fit
Funda- mentalFit
Strategic Fit
Logistics Fit
Funda- mentalFit
Cultural Fit
Strategic Fit
Logistics Fit
Funda- mentalFit
Cultural Fit
Strategic Fit
Logistics Fit
Funda- mentalFit
Cultural Fit
Strategic Fit
Logistics Fit
Funda- mental Fit
Commitment Shared vision Power balance Mutual
benefits Manageable risk Significant Potential
for added value

Agreement strategic goals Compatible business
plans Agreement on configuration Same planning
Pluralism Assimilation Transfer Resistance
Object compatibility Transport mode
compatibility Information flow compatibility
(Source Arnold,1999)
7. Economic Effect of Vertical Cooperation
Costs of production
Coordination costs
Paradigm of cooperation
Paradigm of specialization
Specialization level
Vertical cooperations have the goal to reduce the
coordination costs through intensive cooperation
with selected system suppliers.
7. Economic Effect of Horizontal Cooperation
Individual Demand A
Total Demand ABC
Economy of Scale
Individual Demand B
Individual Demand C
(Electronic) Bundle Platform
Mechanisms of horizontal purchasing cooperation
Economies of Scale
Economies of Information
Economies of Process
Chapter 8
Sourcing Processes
8. Enabling Processes for Global Sourcing
8. Purchasing Portfolio Analysis
  • Kraljics (1983) product portfolio based on two
  • Purchasings impact on the bottom linethe profit
    impact of a given supply item measured against
    criteria such as cost of materials, total cost,
    volume purchased
  • Supply risk measured against criteria such as
    short-term and long term availability, number of
    potential suppliers, structure of supply markets.

8. Supplier Portfolio
Leverage products alternative sources of supply available substitution possible Competitive bidding Strategic products critical for products cost price dependence on supplier Performance based partnership
Routine products large product variety high logistics complexity labor intensive Systems contracting E-Procurement solutions Bottleneck products monopolistic market large entry barriers Secure supply search for alternatives
Purchasings impact on financial results
Supply risk
8. Supplier Portfolio
Leverage suppliers many competitors commodity products Buyer dominated segment Strategic suppliers market leaders specific know-how Balance of power may differ among buyer-supplier
Routine suppliers large supply many suppliers with dependent position Reduce number of suppliers Bottleneck suppliers technology leaders few, if any, alternative suppliers Supplier Dominated segment
Supplier impact on financial results
Supply risk
8. Risk Management
Types of risks
general risks
situational risks
task-specific risks
general risks
indirect way influence of competitors
direct way influence of customers
company size
performance programme
production technology
economic sector
technolo-gical sector
political sector
management of material flow
information technology
physical sector
socio-cultural sector
(Source Beschaffung Aktuell, 02/2011)
8. Risk Management A Process Perspective
  • risk awareness
  • risk perception
  • early warning system
  • risk screening

risk identification
risk management
risk analysis assessment
8. Risk Management An International Perspective
8. Risk Analysis in Global Sourcing
Non-Economical Risks Economical Risks
Political risks Social Conflicts Confiscation of goods Political trade protection e.g. tariffs Administrative risks Bureaucracy Ineficiency of local administration Cultural risks Language Way of life Jurisdictional risks enforceability of contracts Makro-Economical Economic cycles Changes in currency exchange rates Mikro-Economical Transport and distribution risks Contractual risks (Claim Management)
8. Risk Analysis in Global Sourcing
Systematisation of currency exchange risks
Exchange rate change
Estimation risk)
(economic risk)
(transaction risk)
(Source Büschgen, H.E. (1997), International
Finance, S. 311)
8. Risk Analysis in Global Sourcing
- A hedge is a position established in one market
in an attempt to offset exposure to price changes
or fluctuations in some opposite position with
the goal of minimizing one's exposure to unwanted
risk. Example Hedging an agricultural
commodity price A typical hedger might be a
commercial farmer. The market values of wheat and
other crops fluctuate constantly as supply and
demand for them vary, with occasional large moves
in either direction. Based on current prices and
forecast levels at harvest time, the farmer might
decide that planting wheat is a good idea one
season, but the forecast prices are only that
forecasts. Once the farmer plants wheat, he is
committed to it for an entire growing season. If
the actual price of wheat rises greatly between
planting and harvest, the farmer stands to make a
lot of unexpected money, but if the actual price
drops by harvest time, he could be ruined. If the
farmer sells a number of wheat futures contracts
equivalent to his crop size at planting time, he
effectively locks in the price of wheat at that
time the contract is an agreement to deliver a
certain number of bushels of wheat to a specified
place on a certain date in the future for a
certain fixed price. The farmer has hedged his
exposure to wheat prices he no longer cares
whether the current price rises or falls, because
he is guaranteed a price by the contract. He no
longer needs to worry about being ruined by a low
wheat price at harvest time, but he also gives up
the chance at making extra money from a high
wheat price at harvest times.
(Source Dichtl, E. Issing, O. (Hrsg.) Vahlens
Großes Wirtschaftslexikon. 2. Aufl., München
1994, S. 906-907 und Alisch, K. Winter, E.
Arentzen, U. (Hrsg.) Gabler-Wirtschafts-Lexikon.
16. Aufl., Wiesbaden 2004, S. 1381)
8. Risk Management Example BASF
(Source Britt, 2011)
Chapter 9
Controlling of Procurement
9. Controlling of Procurement
  • What should be measured?
  • no single index of performance
  • no universal way of evaluating
  • commercial focus (price, quantity, place,
    service, time, cost savings)
  • efficiency metrics (process costs, TCO-concept)
  • effectiveness parameters (improve capabilities)
  • Who should be interested?
  • procurement management
  • internal customers
  • top management

9. Controlling of Procurement
Key areas of procurement performance measurement
Materials price/cost control
Purchasing Materials costs/ prices
Materials price/cost reduction
Involvement of purchasing in new Product
Product / quality
Purchasing Effectiveness
Purchasing and Total Quality control
Purchasing Performance
Adequate requisitioning
Order and inventory policy
Purchasing logistics
Supplier delivery reliability
Purchasing organization
Purchasing Efficiency
Procedures and policies
Information system
9. Controlling of Procurement
Examples of purchasing performance indicators
Dimension Measurement aimed at C/I Examples
Purchased materials prices and costs Purchased materials cost control Purchased materials cost reduction C C Materials budgets, variance reports, price inflation, reports, purchasing turnover Purchasing cost saving and avoidances, impact on return and investment
Product / quality of purchased materials Early purchasing involvement in design and development Incoming inspection quality control and assurance I C Time spent by purchasing on design and engineering projects, sampling reject rate () Reject rate (), line reject rate (), quality costs per supplier
Purchasing logistics and supply Monitoring requisitioning Delivery reliability (quality and quantity) I/C Purchasing administration lead times, order backlog (per buyer), rush orders, delivery reliability index per supplier, materials shortages, inventory turnover ratio, JIT deliveries
Purchasing staff and organization Training and motivation of purchasing staff Purchasing management quality Purchasing systems and procedures Purchasing research I Time and workload analysis of purchasing department, purchasing budget, purchasing and supply audit
Note C continuous and I Incidental
9. Benchmarking
  • Benchmarking in procurement
  • kind of comparison between firms to improve
    purchasing performance
  • Types
  • business funtion oriented (e.g. outsourcing of
  • supply process oriented (best practices in
    purchasing processes)
  • externally oriented (outside own business
    outside own industry)
  • Model for supply process benchmarking
  • Identification of status quo
  • Cost information and evaluation
  • Illustration of own deficits
  • Checking of transfer possibilities
  • Infrastructure investments
  • Implementation of best practices
  • Continuous improvement

9. Types of Benchmarking
Benchmarking object Product benchmarking Instrument depend heavily on product structure, technology and complexity
Benchmarking object Strategy benchmarking Strategies are often incomparable because they are highly specific for one company
Benchmarking object Organization benchmarking Focuses on structures, not on processes
Benchmarking object Process benchmarking Allows to gain knowledge on ways to handle business activities without the risk, that results are not transferable
Benchmarking subject Company benchmarking Not easy to handle, because it allows no focus
Benchmarking subject Business function benchmarking Concentrates on one business function, in our case on purchasing
Benchmarking partner Internal benchmarking Only possible for multibusiness unit organizations
Benchmarking partner External benchmarking (same branch) Often not easy because the partners are competitors
Benchmarking partner External benchmarking (different branches) Ideal to identify the real best practice benchmark
9. Report of Cross-Industry Standard Benchmarks
Cross-Industry Standard Benchmarks November 2010 Utilities Chemical
Total spend as a percent of sales dollars.......... Procurement operating expense as a percent of sales dollars... Procurement operating expense as a percent of total spend.. Procurement operating expense per procurement employee..... Procurement employees as a percent of company employees.. Total spend per procurement employee. Managed spend per procurement employee. Percent of total spend managed/controlled by procurement... Percent of total spend offshore.... Percent of total spend onshore.... Average annual spend on training per procurement employee.. Cost avoidance savings as a percent of total spend.... Cost reduction savings as a percent of total spend.. Percent of active suppliers accounting for 80 of total spend... Percent of total spend with diversity suppliers... Percent of active suppliers who are eProcurement enabled... Percent of total spend via eProcurement... Percent of total spend via eAuctions... Percent of total spend via procurement cards... Percent of total spend via strategic alliances. 34,36 0,12 0,64 99.309 1,14 20,75 (m) 16,71 (m) 85,48 0,36 99,64 794 1,13 1,22 4,53 12,13 5,62   0,57 2,14 19,81 51,30 0,22 0,39 111.031 0,92 33,43 (m) 31,41 (m) 92,29 15,03 84,97 693 1,12 1,50 4,74 24,42 11,26    
9. Example Balanced Scorecard
9. Controlling of Procurement
if you cant measure it you cant manage it.
Not everything that can be counted counts, and
not everything that counts can be counted.
Albert Einstein (1879 - 1955), German
theoretical physicist
Chapter 10
Logistics as an Enabler
10. Case study production network Behr
Intensive cooperation on capacity, production
technology and logistics
Germany Mühlacker Kirchberg Vaihingen/Enz Mylau
Pforzheim Lippstadt Neustadt/Donau Reichenbach St
uttgart Meerane
USA Dayton Canton Charleston Fort
Worth Webberville
Czech Republic Mnichovo Hradiste
Spain BarcelonaMontblanc
France HambachRouffach
India Pune
Brazil São Paulo
South Africa Durban Pretoria Johannesburg Port
10. The logistics market - study "Top 100
logistics market TUL-logistics goods traffic,
handling, picking and storage activities of the
entire economy Coordinating-logistics order
processing, disposition, supply chain-planning
costs ( holding inventory costs) Not
included industrial production processes, which
are usually associated with functions and cost
responsibilities of the production activities in
the branches of retail trade, carried out by the
sales staff Contract-logistics businesses,
integrating tight relationships between carriers
and service providers several logistics
functions, long term relationships and a high
volume of sales will be handled
  • Market data Germany
  • Market volume 200 Billion Euro
  • Workplaces in the logistics industry 2,65 Mill.
  • Inhouse logistics 51
  • Market volume service provider
  • 98,5 Billion Euro
  • Logistics cost components 8,3 of gross
    domestic products
  • Trends
  • small market growth due to rationalization
  • effects
  • Increase in market share of service provider
  • Growth potential for contract logistics
  • Quantities of goods largely constant/
    transport distances increase

(Source Klaus/Hartmann/Kille 2010/2011)
10. Logistics Market Volume in Europe
(Source Klaus/Hartmann/Kille 2010/2011, p.164)
10. Coordination in Logistics

1. Internal coordination of physical commodity flows (Adjustment of container systems, technical additives, avoiding of breackages in commodity flow
2. Cross-plant coordination with suppliers and customers (Standardization of packages, process flows, means of transport)
3. Coordination of short-term production tasks and commodity flows (optimal production lots and optimal order size)
4. Coordination on product and programme policy level (management of modularization complexity, flexible manufacturing systems)
5. Coordination in structure decisions (logistics requiremented constructions of products, recyclable design)
6. Coordination on strategic corporate planning level (coordination with competitive strategy, divisional strategies)
10. Definitions of Logistics
  • Logistics is responsible for regional and
    temporal change of goods
  • Information flow and product flow belong
    together and represent
  • the main elements of logistic systems
  • Efficient and effective arrangements of logistic
  • Focusing on the requirements of customers

10. Economic Targets of Logistics
System of logistics costs
(Source Pfohl 2004, p. 31)
10. Logistics Success Costs Reduction vs.
Performance Improvements
Logistics Success
Logistics Costs
Logistics Performance
Reduction of delivery time Improvement of
delivery reliability Improvement of delivery
condition Increase of delivery flexibility etc.
Reduction of carrying costs Reduction of
storage costs Reduction of transportation
costs Reduction of order processing costs etc.
overall optimization
Chapter 11
Supply Chain Management
11. The Concept of Supply Chain Management
11. The Concept of Supply Chain Management
Cooper/Lambert/Pagh (1997) The integration of
all key business processes across the supply
chain is what we are calling supply chain
11. Supply Chain Operations Reference-Model
11. Supply Chain Planning Tools
Strategic Planning Level
Tactical Planning Level
Operational Level
Strategic (Supply Chain) Management
Supply Chain Planning Tools
Market Analyses
International Logistics
Supplier Manage-ment
Product Develop-ment
ERP Systems
Finan-cial Analysis
Customer Management
Cross Docking VMI
Production Control
Product Data Management
Finan-cial Control
Asset Management
HR Mana-gement Financial Mana-gement Life-Cycle Mana-gement Procure-ment Pro-duction Distribu-tion Customer Service Final Customer
11. Challenges for Supply Chain Management
11. Crossroads in Supply Chain Management
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