Handout for SCDS OBT 2.

3
Strategic Sourcing - Part III
For VIDEO LECTURE, Click:
https://drive.google.com/file/d/1ikKHW8YfzBp
ClouA8AD0w-jAOLvMY0ph/view?usp=sharing
 An Overview of
Strategic Sourcing
and
Vendor Development
(Part III)
(Refer Handout for Full Content)

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.2 of 47

Sourcing Process
1. 2. 3. 4. 5.
Supplier Supplier Design Procurement Sourcing
Scoring and Selection Collaboration Ordering Planning and
Assessment and Involving and delivery Analysis
Rating Contract suppliers of products Analyzing
supplier Negotiation when at the lowest spending across
performance designing possible various
based on their components overall costs suppliers and
impact on for the final component
supply chain product categories
surplus and to identify
total cost opportunities
for reducing
total cost

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.3 of 47

1. Supplier Scoring and
Assessment Process
 Must identify and track performance
along all dimensions that affect
the total cost of doing business
with a supplier.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.4 of 47

Factors to Be Considered in
Supplier Scoring and Assessment
 Quoted Price  Inbound Transportation Cost
 Replenishment  Pricing Terms
Lead Time  Information Coordination
 On-Time Capability
Performance  Design Collaboration
 Supply Flexibility Capability
 Delivery Frequency/  Exchange Rates, Taxes,
Minimum Lot Size and Duties
 Supply Quality  Supplier Viability

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.5 of 47

2. Supplier Selection and
Contract Negotiation
 Supplier selection uses the output
from supplier scoring and assessment
to identify the appropriate supplier(s).
 A Good Contract:
a) should account for all factors that
affect supply chain performance, and
b) should be designed to increase
the overall supply chain surplus.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.6 of 47

3. Design Collaboration
 Is important as 80% of the cost
of the product is determined
during the design stage.

 Has great impact on

competitive advantage
of the firm

 Ensures that design changes

are communicated effectively
to all parties involved
in design and manufacturing

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.7 of 47

4. Procurement/Third-Party
Spend or Expenditure
 Procurement requires third-party spend
or expenditure, which is money paid
to other companies for goods and services.

 The procurement process differs significantly for

a) Direct Materials,
b) Indirect Materials, and
c) Capital Assets/Services.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.8 of 47

4. Procurement Process:
(a) for Direct Materials
 Ensure matching of
supply and demand
through coordination of
the entire supply chain
 Make production plans and
current levels of inventory
at the manufacturer
visible to the supplier

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.9 of 47

4. Procurement Process
For Direct Materials:
 Make the suppliers’ available capacity
visible to the manufacturer
so that orders for components can be
allocated to the appropriate supplier
 Enable alerts that warn both
the buyer and supplier
of potential mismatches

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.10 of 47

At a strategic level, the direct expenditure
(cost) can be divided into:
1) Cost Invested in
a Function of the product
that customers want; and

2) Cost Invested in
a Feature of the product
that customers are
willing to pay for.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.11 of 47

Function versus Features
# FunctionS Features
What customers want What customers are
1
in the product willing to pay for
A must have, Something that might help
something that is the customer select between
intrinsic to the article; two competing products;
2
for example, an engine, most likely at extra cost,
wheelbase, or for example, metallic paint,
a seat for a car or a sunroof.
Functions need to be the Features need to be
3
focus of procurement. tightly managed.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.12 of 47

 In a competitive market, over time,
features might become functions.
 For a start-up, features can be distractions
that might compromise on the longevity
of the product’s attractiveness
if they are introduced from day one.
 Deciding when to introduce
additional features is critical
to a product’s freshness
and market share.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.13 of 47

4. Procurement Process
(b) for Indirect Materials
The transaction costs for indirect materials
are high due to:
 Selection from many catalogs,
some of which might be outdated
 Need to get approval for each item
 Multiple purchase orders
 Diversity of processes and systems
used for different materials

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.14 of 47

Hence for Indirect Materials:
 Seek providers that will
deliver complete solutions
rather than components,
e.g., serviced accommodation,
complete seats for cars,
payroll services, etc.

 Go for centralized purchasing

of aggregate quantities

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.15 of 47

Hence for Indirect Materials:
 Focus on decreasing
the transaction cost
for each order

 Employ a good e-procurement process

(easy search, automatic approval
and transmission of PO, and
automatic updating of
accounts payables)

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.16 of 47

4. Procurement Process
(c) for Enabling Assets/Major Services
 The Enabling Assets and Services
Are Acquired to Enable the Organization
to Fulfil Its Customer Propositions; But…

 They Don’t Go into the Goods

and Services Being Sold.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.17 of 47

 Examples of assets include
the offshore platforms of an oil company,
the trucks of a carrier, voice/data networks
of a telecommunications company, and
branches of a bank.

 Examples of major services include

R&D, Sales and Marketing, etc.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.18 of 47

5. Sourcing Planning and Analysis
1. Analysis of Procurement Spending
2. Analysis of Supplier Performance

To decide on:
 Portfolio of Suppliers
 Allocation of Demand
among the Chosen Suppliers
 Expected Discounts

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.19 of 47

5.1 Analysis of Procurement Spending
 Periodically aggregate the spending
a) across and within categories, and
b) across suppliers.

 This information can then be used:

 To Determine Economic Order Quantities,
Volume Discounts, and Projected Quantity
Discounts on Future Volumes
 To Leverage Your New-Found Scale
 To Move Volumes to the Best Contracts
 To Turn off Duplicate Spends

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.20 of 47

5.2 Analysis of Supplier Performance
 Supplier performance should be
measured against plan on all dimensions
that affect cost, such as:
a) Responsiveness
b) Lead Times
c) On-time Delivery
d) Quality
e) Delivery Accuracy

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.21 of 47

Developing a Supplier Portfolio
 The supplier portfolio should
not include multiple suppliers
with identical characteristics.

 Supplier portfolio should be constructed so that:

 one supplier source performs
very well on one dimension,
whereas:
 another source performs very well
on a complimentary dimension

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.22 of 47

 Allocation of Demand
should be related
to the Economic
Manufacture quantity
of each supplier and
its cost of supply.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.23 of 47

Examples:
Supplier Portfolio Allocation
Low-cost supplier
with longer lead time
High-cost supplier
with short lead time
Strategic Sourcing and Vendor Development - III (by khalid_sheikh) /
Large steady orders for
the base/stable demand
that is independent of
fluctuations in demand
Small orders
to buffer against
the variations in
demand and supply
4.3.24 of 47
Examples:
Supplier Portfolio Allocation
Very Low-Cost Orders for products
Supplier with where cost leadership
Lower-but- is the most
Acceptable Quality critical criterion
High-Cost Supplier Orders for products
with High Quality where quality is
the most critical criterion

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.25 of 47

Software Solutions Are Now Available
to Support all the processes within
Supplier Relationship Management (SRM):

a) Design Collaboration

b) Sourcing

c) Negotiation

d) Buying

e) Supply Collaboration

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.26 of 47

(a) Design Collaboration Software Facilitates:
 Joint selection (with suppliers)
of components that have
positive supply chain characteristics,
such as:

 Ease of manufacturability

 Commonality across
several end products

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.27 of 47

(a) Design Collaboration Software Facilitates:
 Sharing of Engineering Change Orders (ECOs)
between a manufacturer and its suppliers,

 This eliminates the costly delays

when several suppliers
are concurrently designing
components

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.28 of 47

(b) Sourcing Software Supports:
 Supplier Evaluation
and Qualification

 Supplier Selection

 Contract Management

 Spend Analysis

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.29 of 47

(c) Software Can Facilitate Negotiation
Process through Automation of
Many Activities during:
 Request for Quote (RFQ) Process

 Design and Execution of Auctions

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.30 of 47

(d) “Buy” Software Facilitates:
 Creation, management, and
approval of purchase orders:

 Resulting in cost and

lead time reduction.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.31 of 47

(e) Supply Collaboration Software Facilitates:
 Collaborative forecasting,
production planning, and
inventory management:

 To ensure a common plan

across the entire supply chain

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.32 of 47

Major Sourcing Software Vendors
 Best-of-Breed Vendors for
Software for Design Collaboration:
Agile and Matrix One
 Best-of-Breed Vendor for
Software for Procurement:
Ariba (Acquired by SAP in 2012)
 Vendors Providing Complete e-Business Suite
 SAP (SAP ERP MM, SAP SCM, SAP SRM)
 Oracle (JD Edwards + PeopleSoft + Oracle)
 …

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.33 of 47

Purchasing and
Working Capital Management
 For smaller purchases:
p-Cards pay to the suppliers
within a few days but
offer up to two months’ credit
to the buyer

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.34 of 47

Invoice/Bill Discounting:
A Form of Short-Term Borrowing
 Allows a supplier to borrow
a percentage of the value of its Sales Invoices
(Receivables) from a finance company
before the customer has actually paid
using the unpaid sales invoices as collateral.
 The finance company charges
a monthly fee for the service, and
interest on the amount borrowed.
 Responsibility for raising sales invoices and
for credit control stays with the supplier.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.35 of 47

Factoring
 Supplier sells its
accounts receivable (invoices)
to a third party, called a factor,
at a discount.

Factoring is Bill Discounting is

the sale of a borrowing that
receivables. uses receivables
as collateral

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.36 of 47

Forfaiting is
a factoring arrangement
used in international trade finance
by exporters who wish
to sell their receivables
to a Forfaiter.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.37 of 47

Supply Chain Finance
(Supplier Finance or Reverse Factoring)
 Allows a supplier to sell its invoices
to a bank at a discount as soon as
the invoices are approved by the buyer.
 Supplier gets its money earlier
while the buyer can pay later
(up to 2 months).
 The bank, instead of relying on
the creditworthiness of the supplier,
deals with the buyer, who is
usually a less risky prospect.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.38 of 47

A Typical Extended Payables Transaction
1. A Buyer Company buys goods
from a Supplier Company.

2. The Supplier Company supplies the goods

and submits an invoice to the Buyer Company;
the Buyer Company approves the invoice
for payment on standard credit terms
(for example, 30 days).

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.39 of 47

3. If the Supplier Company requires
payment before the 30-day credit period
 The Supplier Company requests
immediate payment at a discount
for the approved invoice from
Buyer’s financial institution.

4. The financial institution will remit

the invoiced amount (less
a discount for early payment)
to the Supplier Company.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.40 of 47

 5. In view of its relationship with
the Buyer Company, the financial institution
may extend the payment period
for a further period of 30 days.

 The Buyer Company,  The Supplier Company

thus, obtains longer receives payment faster
credit terms (for 60 days, and at a lower cost
rather than the normal than if it had used
30 days provided by a traditional
the Supplier Company). factoring agency.

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.41 of 47

Risk Management in Sourcing

Risk Causes Risk Mitigation Strategies

Inability Disruption or Disruption Risk:
to Meet delay from Develop multiple sources
Demand the supply source, for high-demand items
on Time serious in case of Delay Risk:
sole/single supplier
Carry inventory
or with only a few (for low-value,
suppliers long-lifecycle items)
Develop
a responsive backup source
(for high-value,
short-lifecycle items)

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.42 of 47

Risk Management in Sourcing (continued)

Risk Causes Risk Mitigation Strategies

Increase in Industry-wide Develop a portfolio of
Procurement demand long-term and short-term
Costs exceeds supply contracts
Unfavorable Use financial hedges, or
exchange rates develop a global supply network
that can be reconfigured based
on exchange rate fluctuations
Single supplier Develop alternative sources or
bring part of the supply capacity
in-house

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.43 of 47

Risk Management in Sourcing (continued)

Risk Causes Risk Mitigation Strategies

Loss of Sharing of Bring or keep
Intellectual product/ sensitive production
Property process in-house
knowledge Even when production is
outsourced, maintain ownership of
those parts of the production
equipment that are necessary
for the sensitive production
Example: Motorola owned
some testing equipment
at its contract manufacturers

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.44 of 47

Drivers of Effective Sourcing
1. Multifunctional Teams
2. Coordination across
Business Units and Regions
to maximize economies of scale
and to reduce transaction costs

3. Focus on the Total Cost of Ownership (TCO)

to reduce total costs
4. Long-Term Relationships with Key Suppliers

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.45 of 47

Vendor Development Practices
Followed by Toyota and Honda
1. Understand how suppliers work

2. Turn supplier rivalry into opportunity

3. Supervise vendors

4. Develop suppliers’ technical capabilities

5. Share information intensively but selectively

6. Conduct joint improvement activities

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.46 of 47

 End of
SCDS Module 2

Strategic Sourcing and Vendor Development - III (by khalid_sheikh) / 4.3.47 of 47