Sourcing Strategy Development

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Sourcing Strategy Development

• BUS 416W
• FALL 2002

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Purchasing and Supply Chain Management

• Purchasing Strategy

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Defining Strategy

• The strategy of an organization, or of a subunit
  of a larger organization, is a conceptualization
  of
• Long-term objectives and purposes of the
  organization
• Broad constraints and policies that restrict
  activities
• Current set of action plans and near-term goals
  expected to help achieve an organizations
  objectives

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Strategy Levels

• Corporate Level Strategies

Business Unit Strategies
Functional Strategies
Strategies require horizontal and vertical
alignment!
Departmental Strategies
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Data Collection Sources

• Internet Searches
• www.transportlink.com
• www.thomasregister.com
• www.stats.bls.gov/ppihome.htm
• Prior Purchase Files
• Discussions with users, customers, purchasing
  colleagues and others

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Purchasing and Supply Chain Management

• Portfolio Analysis

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Portfolio Analysis
A Tool for Developing Supply Strategies!
Strategic
Leverage
High
Value to Buyer
Acquisition
Multiple
Low
Few
Many
Number of Capable Suppliers
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Portfolio Analysis

• Portfolio Analysis Quadrant Characteristics
  Acquisition
• Fewer capable suppliers within a region
• Low priority items
• Fewer total dollars spent
• May consume a disproportionate amount of time and
  dollars to acquire
• Developed quality and technology
• Able to move easily between suppliers--low
  switching costs
• Focus on removing effort and transactions through
  low dollar purchase systems

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Portfolio Analysis

• Strategy emphasis Acquisition
• Automate ordering/releasing systems
• Simplify processes and procedures
• Off-load ordering to users or suppliers through
  low value purchase systems
• Standardize and streamline where possible

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Low Value Purchases
Strategic
Leverage
High
Value to Buyer
Acquisition
Multiple
Low
Few
Many
Number of Capable Suppliers
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Low Value Purchases

• Key Question--

How do organizations reduce the effort and
transactions required to process low value
purchases? (Acquisition quadrant)
Based on a 1998 research project conducted by
Trent and Kolchin titled Reducing the Cost of
Processing Low Value Purchases
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Low Value Purchases

• Firms that have made greater progress in managing
  low value purchases..
• Emphasize certain methods, approaches, or
  activities when reducing the effort or
  transactions required to process low value
  purchases (in order of effect)
• 1 On-line ordering through the use of
  electronic catalogs
• 2 Procurement cards issued to users
• 3 Electronic commerce through the internet

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Low Value Purchases

• 4 Purchasing process redesign efforts
• 5 Automated accounts payable systems
• 6 Allowing users to contact suppliers below
  some dollar threshold
• 7 Consolidation of purchase requirement
  between units
• 8 Auto fax with suppliers
• 9 Electronic data interchange with suppliers
• 10 Electronic funds transfer payments

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Portfolio Analysis

• Portfolio Analysis Quadrant Characteristics
  Multiple
• Greater number of suppliers
• Low to medium annual dollars
• Able to move easily between suppliers--low
  switching costs
• Developed quality and technology
• Focus on price analysis to gain benefit

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Portfolio Analysis

• Strategy emphasis Multiple
• Let market forces work
• Play the market--perform price analyses
• Periodically market test
• Apply pressure
• Short-term commitments (with the option to renew)

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Portfolio Analysis

• Portfolio Analysis Quadrant Characteristics
  Leverage
• Greater number of suppliers
• Medium to high annual dollars
• Win-win approach may work here
• Focused commodity families
• Combining contracts across units yields savings
• Developed quality and technology
• Able to move easily between suppliers
• Focus on cost and price analysis

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Portfolio Analysis

• Strategy emphasis Leverage
• Combine volumes for lower cost
• May use a longer-term agreement
• Use target costing
• Probe for efficiencies or improvements

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Portfolio Analysis

• Portfolio Analysis Quadrant Characteristics
  Strategic
• Few capable suppliers
• Items or services critical to success
• Unique or customized items
• Collaborative or interdependent relationships
• Unable to move between suppliers easily
• Cost analysis yields benefits
• Unproven or undeveloped technology
• Win-win environment

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Portfolio Analysis

• Strategy emphasis Strategic
• Joint ventures/alliances/partnerships
• Practice reverse marketing
• Develop collaborative relationships
• Pursue annual cost/price/quality/cycle time
  improvement goals
• Use of longer-term agreements

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Commodity Study Guidelines

• Pages 191-193 in Textbook

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Supply Management Strategy Formulation

• Discussion question

What can purchasing contribute within an
integrated strategy formulation process?
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Are You Able to Answer the Following Questions?

• What are past expenditures by commodity and by
  supplier?
• What are expenditures as percent of total for
  business unit?
• What is the technology roadmap, and that of the
  supplier?
• What are current / future volumes and user
  location requirements?
• Are there opportunities to leverage commodity
  expenditures with similar commodities?

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Are You Able to Answer the Following Questions?

• Who are current and potential suppliers?
• What are the characteristics of the marketplace
  (best price, average price, etc.)
• What are future trends in terms of supply
  continuity and expected pricing
• What are strengths and weaknesses of your
  suppliers, and who are the market leaders?

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Key Commodity Strategy Questions

• Insource or outsource?
• Cost-vs. market-based approach
• Type of suppliers?
• High or low technology
• Full service
• Niche or distributor
• Local or global supplier?
• Single, dual or multiple source?
• Percentage of buy to each supplier?

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Key Commodity Strategy Questions

• Long-term or short-term contract?
• Evergreen or escape clause?
• Degree of buyer/supplier risk taking?
• On-line or manual ordering?
• Supplier development - degree of commitment?
• Use full-service suppliers?
• Black box or traditional level of supplier
  involvement in design?

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Measure and Evaluate Strategy Performance

• Ensure clear metrics with linkages to business
  unit strategies
• Use internal / external metrics to evaluate
  progress
• Hold post-mortems on successful and failed
  strategies
• Modify strategy as necessary
• Hold stakeholder meetings and provide feedback

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Translating Objectives into Purchasing Goals
Company Objectives
Continuous Improvement
Cross-Functional Business Objectives
Performance Measurement Review
Purchasing Supply Chain Goals
Purchasing Supply Chain Strategies
Performance Measurement System
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Commodity Strategy Development Process
1. Business Requirements Definition
2. Define Strategic Importance of Commodity
3. Determine Business Requirements and Supply
Market Research
5. Develop Sourcing Strategy and Objectives
4. Goal Setting Conduct Gap Analysis
7. Results Monitoring and Review
6. Execute the Plan!
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Portfolio Analysis Approach
High
Strategic
Leverage
Value to Buyer
Acquisition
Multiple
Low
Few
Many
Number of Capable Suppliers
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Example of Goal Setting
Business Goals (SBU)

• Increase volume and market share through pricing
  reduction
• Reduce cost of goods by 20
• Reduce purchase prices (with redesign) by 25 in
  12 months
• Develop lower cost production processes or modify
  design resulting in 25 lower prices

Product Goals
System / Component Goals
System / Component Goals
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Stages of Strategy Evolution

• Global supply chains with external customer focus
• Cross-enterprise decision making
• Full service suppliers
• Early sourcing
• Insourcing/ outsourcing to maximize core
  competencies of firms throughout the supply chain

• Global sourcing
• Strategic supplier alliances
• Supplier TQM development
• Total cost of ownership
• Non-traditional purchase focus
• Parts/service standardization
• Early supplier involvement
• Dock to stock pull systems

• Ad hoc supplier alliances
• Cross-functional sourcing teams
• Supply base optimization
• International sourcing
• Cross-location sourcing teams

• Quality/cost teams
• Longer -term contracts
• Volume leveraging
• Supply base
• consolidation
• Supplier quality focus