Sourcing
Development of sources
Vendor selection
Vendor rating
Procurement processes
1
Theentire set of processes to purchase goods
and services
Supplier Supplier Design Sourcing
Selection and Procureme
scoring and Contract Collab nt Planning and
assessment negotiation oration Analysis
2
Supplier scoring and assessment – process used to rate supplier
performance. Price is not the only criteria. Lead time, quality, reliability,
innovation and design capability are key items. Rating system has to
identify and track all parameters so that total cost/ benefit of using a
particular supplier is identified.
Supplier Selection and Contract – uses output from assessment. Contracts
are made for win-win situation (NB HCL mandate, to reduce costs to clients
on y on y basis)
Design Collaboration – as 80% of cost of new products or assemblies is in
the design stage, this capability and competency is an important factor
Procurement – linked to timeliness, reliability and cost factor
Sourcing Planning and Analysis – to analyse the spending across various
suppliers and component categories and identify opportunities for reducing
overall costs
3
Due to outsourcing, collaborations etc, ‘Cost of goods Sold’ ie bought out
items or assemblies cost, now represents 50% or even more of the total
cost of item.
Effective sourcing decisions can greatly impact the strategic competitive
advantage of the firm
Some benefits:
Aggregation of orders gives more economies of scale
Transaction efficiencies reduce overall purchase costs, more so for low
value – high volume items (cat C)
Design collaboration reduces cost overall, even if you have to develop
the supplier from scratch (china case)
Seamless processes improve coordination. Therefore better supply
demand balance.
Good contracts help in sharing risk and reward, therefore higher
profits
Auctions can be used to further have competition and lower price
4
Price – this is important, but not the only factor
Replenishment lead time – shorter time = smaller safety inventories
On time performance – lead time variability reduces = smaller safety inventory
Supply flexibility – ability to handle peaks and troughs – imapcts safety inventory
Delivery frequency and minimum lot size large lot size = longer cycle time = more
cost of inventory
Supply quality – higher rejection= larger safety inventory
Inbound transportation costs – cost, distance and frequency impact
Pricing and payment terms – credit terms and lot sizes
Information management and integration – good coordination means seamless info
exchange = better efficiencies
Design collaboration capability – critical for long term success
Exchange rates, taxes and duties – currency fluctuations and political scene
Supplier viability and sustainability – long term relationship?
5
Purchas Inventor Safety Tpt Product
e price y Cycle Inventor Cost Introductio
of parts y n time
Replenishment lead
time
X
On time performance X
Supply flexibility X
Delivery frequency X X X
Supply Quality X X
Inbound Tpt costs X
Pricing terms X X X
Info coordination X X
Design collaboration X X X X X
Exchange rates, taxes X
Supplier Viability X X
6
After drawing up the score card analysis as per earlier table, short list will
emerge
Final selection – decision – single supplier or multiple? – coordination across
multiple suppliers?
Contract design should facilitate desirable supply chain outcomes, and
minimise actions that may hurt performance
Questions;
How will the contract impact the firms profits and total supply chain
profits?
Will the incentives in the contract lead to information distortion/
manipulation?
How will the contract influence the supplier performance along key
performance measures
7
More than 50% - 70% of manufacturing spend is through procurement today
Both suppliers and manufacturers have to constantly collaborate at the
design stage if costs are to be kept low.
80% of cost is fixed at the design stage itself
Shrinking product life cycles require design collaboration
High customization of products also requires design collaboration so that
universality of components can be optimsied.
Products / assemblies may sometimes be found from existing production
lines , netting huge cost savings (Maruti Suzuki example)
Universal components can be configured differently for different usage
(Dell, Cisco, car ECM)
Best in class data shows that successful integration shows cost decrease by
20%, quality improve by 30% and time to market reduce by 50%
Design collaboration can include both product and process design
8
Direct materials – those that are directly used to make finished goods ie components
such as hard discs, processers etc for PC’s.
Watchpoint: ensure matching of supply and demand. High two way visibility with
alerts
Indirect materials – those that required to support the operations of a company eg
PC’s for a car manufacturing co. Often non predictable and non recurring
Watchpoint: Focus on reducing transaction costs, eg rate contracts, e procurement
with multiple vendors etc
For both: Consolidate as much as possible to avail best bulk discounts and
uniformity of usage across company
Direct Materials Indirect Materials
Use Production Maintenance, repair and support
operations
Accounting Cost of goods sold SG & A
Impact on Production Any delay will delay Less direct impact
production
Processing cost relative to Low High
transaction value
No of transactions Low High 9
Value / Criticality factor:
Indirect – aim to lower cost of acquisition/ transaction
Direct – classify into bulk, strategic and crtitical items. For bulk, go to auction. For
critical, availability is key. High coordination is required. For strategic, look for
long term relationships.
High
Critical Strategic
Items Items
Critical
Product Categorization by Value
and Criticality
Bulk
General
Purchase
Items
Low Items
Low High
Value / Cost
10
Aggregation of spend across categories and suppliers
Info can be used to improve bulk buying ,EOQ and future discounts
Simplest step is to match own EOQ with suppliers economic production
capacity
Analyse the performance against all dimensions of responsiveness, lead
time, on time, quality, accuracy etc
Decide supplier portfolio. Set up portfolio so that each has a strength in
one complementary dimension.
Allocate orders – suggested that cheaper suppliers of lower performance
may be used to supply base demand while higher cost better performing
suppliers should buffer the variation in demand.
11
Use multi functional teams
Ensure coordination across regions and business units – especially for MRO
items which can be high cost
Always evaluate the total cost of ownership
Build long term relationships with key suppliers
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