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SCM8602: Sourcing Management

Instructions:

1. Study and analyze the following three cases.

2. Make a report in word file, put a cover page with your name, ID, date, etc.
3. From second page, write the answers to the questions sequentially.
4. Convert the file into PDF format and name the file after your ID
5. Send the file to the following e-mail address on or before 14/08/2021.
hasan.maksud@bracu.ac.bd
6. Avoid any form of plagiarism.
1. Case Study 1: E-Procurement at IBM

“In 1999, IBM did what would seem to be a near impossible task. It began doing business with 12,000
suppliers over the Internet sending purchase orders, receiving invoices and paying suppliers, all using
the World Wide Web as its transaction-processing network.”

Setting up 12,000 suppliers to do business on the Internet was relatively easy compared to the
resistance of suppliers to link to IBM via EDI (electronic data interchange). Suppliers who didn’t have
large contracts with IBM balked at EDI because of the expense of special software and a VAN (value-
added network) that were needed to do EDI. No such problem with using the Internet: Suppliers don’t
need special software or a costly VAN to do business with IBM.

The Internet’s simplicity reduces costs for IBM and its suppliers. IBM estimated that it saved $500
million in 1999 by moving procurement to the Web, and believes that is only the tip of the iceberg. Much
of the savings came from eliminating intermediaries. IBM uses the Web to manage multiple tiers of
suppliers and as a tool to work with suppliers to improve quality and reduce costs.

But cost reduction was not the only reason IBM switched to Internet procurement. Web-based
procurement is a key part of its supplier management strategy: IBM sees great value in using the
Internet to collaborate with suppliers and tap into their expertise much more rapidly than previously.
“The Internet will also allow IBM to collaborate with suppliers over scheduling issues. If the company
wants to increase production of a certain product it will be able to check with component suppliers and
determine if suppliers can support the increase. If there are schedule cutbacks, [it] will be able to notify
suppliers almost instantaneously and excess inventory can be avoided.”

And although supply chains are viewed as sequential, IBM doesn’t necessarily want to manage them
that way. Rather, it wants to use the Internet to manage multiple tiers of suppliers simultaneously. An
example of this is how it deals with CMs (contract manufacturers). The company sends forecasts and
purchase orders to the CMs for the printed circuit boards they supply. It also gives all the component
manufacturers the requirements and they ship parts directly to the CM. The company estimates it
saved in excess of $150 million in 1999. “The savings were the difference between contract
manufacturers’ price for components used on the boards and IBM’s price that it had negotiated with
component suppliers.”

Because the Internet is becoming crucial to IBM’s supplier management strategies, IBM is trying to
make it easier for suppliers to do business over the Web. The company has developed a Web-based
portal to provide a single entry point to IBM. As is the case with the most large companies, IBM has
multiple interfaces with its suppliers, including engineering, quality, as well as purchasing, and typically
suppliers have to connect to separate URLs (universal resource locators) in a company. IBM’s portal
provides a single point of entry for suppliers, making it easier for suppliers to do business with IBM and
increasing the speed of the supply chain. Speed is vitally important in the electronics industry due to
very short product life cycles. If products don’t get to the market quickly, most of the profit opportunity is
lost.

Still another benefit envisioned by IBM will be the ability to form strategic alliances with some of its
suppliers. In the past, the fact that many suppliers used by IBM for its production processes were as far
as 12,000 miles away made it difficult to build strategic alliances with them. IBM believes that using the
Internet will strengthen relations and enable it to develop alliances.

“The Internet also will play an important role in IBM’s general procurement . . . IBM was doing EDI with
core production suppliers, but not with . . . other forms of general procurement. Purchasers were still
faxing and phoning orders, which is timely and costly.”

Additional cost savings come from small volume, one-of-a-kind special purchases, because of the
speed and ease of using the Internet.

Web-based procurement will eliminate mistakes that occur during the procurement process due to
having to type or enter prices and other figures on paper documents.

Questions

a. How did IBM achieve cost reductions by using the Internet for procurement? Aside from cost
reduction, what major value does IBM envision for its interaction with suppliers?
b. How does use of the Internet for procurement reduce mistakes? Indicate how using the Internet
made that benefit possible.
c. Identify the risks there in the e-procurement process and make a list of the risks.

2. Case Study 2: B & L Inc.

Brian Wilson, materials manager at B&L Inc. in Lancaster, Pennsylvania, was considering a proposal from his
purchasing agent to outsource manufacturing for an outrigger bracket. It was the end of April and Mr. Wilson had
to evaluate the proposal and make a decision regarding whether to proceed.
B&L Inc. Background
B&L Inc. manufactured trailers for highway transport trucks. The company comprised three divisions: the Trailer,
Sandblast & Paint, and Metal Fabricating Divisions. Each division operated as a separate profit center, but
manufacturing operations between each were highly integrated. The Metal Fabricating Division produced most
of the component parts of the trailers, the Trailer Division performed the assembly operations, and the
Sandblast & Paint Division was responsible for completing the sandblasting and final painting operation. To meet
the demand, B&L manufactured approximately 300 trailers per year, with about two-thirds produced during the
period from November to April (25 weeks). The demand and manufacturing of the trailers are normal with a
standard deviation of two trailer per week.

The Outrigger Bracket

The outrigger bracket, part number T-178, was an accessory that could be used to secure oversized containers.
The bracket consisted of four component parts welded together, and each trailer sold by B&L had 20 brackets.

The Metal Fabricating Division was presently manufacturing the outrigger bracket. The subassembly
parts T-67, T-75, T-69, and T-77 were processed on a burn table, which cut the raw material to size.
Although the burn table could work with eight stations, this machine had only been operating with one
station. The final assembly operation, T-70, was performed at a manual welding station. Manufacturing
lead time for the outrigger bracket was two weeks. However, the Metal Fabricating Division had been
able to coordinate supply and production with assembly operations.

Consequently, finished inventory levels of the outrigger bracket were kept to a minimum (20 brackets).
B&L’s inventory holding costs were 20 percent per annum.

The Outsourcing Decision

In an effort to reduce costs, the purchasing agent, Alison Beals, who reported to Brian Wilson, solicited
quotes from three local companies to supply the outrigger bracket. Mayes Steel Fabricators (Mayes), a
current supplier to B&L for other components, offered the lowest bid, with a cost of $108.20, FOB B&L.
Brian met with the controller, Mike Carr, who provided a breakdown of the manufacturing costs for the
outrigger bracket. Looking at the spreadsheet, Mike commented: “These are based on estimates of our
costs from this year’s budget. Looking at the material, labor, and overhead costs, I would estimate that
the fixed costs for this part are in the area of about 20 percent. Keep in mind that it costs us about $75
to place an order with our vendors.” Exhibit 1 provides B&L’s internal cost breakdown and details from
the quote from Mayes.

EXHIBIT 1 Manufacturing Costs and Mayes Quote:

Outrigger Bracket T-178

Parts Mayes Steel Fabricators B&L Manufacturing Costs

T-67 $14.60 $17.92
T-75 21.10 17.92
T-69 18.50 45.20
T-77 13.00 10.37
T-70 41.00 58.69
Total $108.20 $150.10

Brian expected that B&L would have to arrange for extra storage space if he decided to outsource the
outrigger bracket to Mayes, who had quoted delivery lead time of four weeks. Because Mayes was
local and had a good track record, Brian expects the need to carry a safety stock for a 90% service
level. From the communication with Mayes, he also expects an order quantity of 800 brackets per lot.
B&L was operating in a competitive environment and Brian had been asked by the division general
manager to look for opportunities to reduce costs. As he sat down to review the information, Brian knew
that he should make a decision quickly if it was possible to cut costs by outsourcing the outrigger
bracket.

Questions:

a. Analyze the information and make a recommendation.

b. What are the risks there in the procurement process?

3. Case Study 3: TBL TOOLS, INC.

TBL Tools, Inc. manufactures a line of power and hand tools for industrial and home use that is
marketed under its own name. In addition, the company produces parts and accessories for power tools
that are marketed by a large retail chain under the chain's name. TBL Tools, Inc., must meet the quality
requirements and delivery schedules as established by the chain. The main production facility of the
company is located around Duisburg, Germany. TBL Tools has a retail market throughout Europe,
Russia, India, and in many Asian countries.
 
During 2019, sales of tools and accessories to the chain exceeded $230,000,000. Management of TBL
Tools believes that sales to the chain would contribute significantly if the cost of procuring as well as
storing and distribution decreased. The company is considering selecting suppliers of special parts
(BAZ-501) from China and/or South Korea. Currently, annual usages of the parts are around 390,000
units with a weekly standard deviation of 1500 units. Corporate managers met and made a shortlist of
two companies: one Xian Corp. from Chongqing, China and another Youngon Ltd. from Seoul, South
Korea. They found that the quality of the special parts of both companies is comparable. But initially,
they want to select and make an agreement with one company. The inventory manager informed that
there is a space for 50,000 units of the part.

Xian Corp has offered a FOB price of $34 per unit for the next two years with a lot of a minimum of
45,000 units. Xian also mention that the best way to transport products from Chongqing to Duisburg is
railway and 42,000 units is a cost-effective lot for transportation. Other lot sizes will increase the cost.
Transporting using railway from Chongqing to Duisburg requires a lead time of 4 weeks with a freight
cost of $2.10 per unit. 
The offer from Youngon Ltd is $32.50 per unit up to the airport with a minimum  of 15,000 units to be
transported from Seoul to Duisburg using cargo plane. Airfreight charge is $8.20 per part. It requires one
week to forward and clear a cargo. Youngon’s price offer is also for the next two years.
It is found from previous experience that around 0.3% parts become obsolete during transportation by
train against 0.42% parts by air.
The finance manager of the company informed the production manager that the annual stock inventory
holding cost is around 27% of the price whereas in-transit holding cost is 18% of the price. Supply chain
manager stated that they can manage 3% stock out risk for the product.

DISCUSSION QUESTIONS

a. Evaluate and find which one of the companies will you choose?

b. Identify the risks there in selecting supplier and in the purchasing process.
Chapter 11S Blue