VILAS HDSCM TOT GPM 3 (GP Operations)

GPM – Chapter 3
Copyright © 2006. All rights reserved by International Freight Consultants (S) Pte.Ltd.
Global Procurement
Operations
Chapter 3
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VILAS HDSCM TOT Programme HCMC/Vietnam May - June 2019 (Thomas SIM)
GPM – Chapter 3
Learning Objectives
• To understand the Key Success Factors in
Global Operations and Benchmarking
Practices
• To understand the process of Global Sourcing
• To understand the concept and application
of Outsourcing
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GPM – Chapter 3
Product Life cycle
home electronics in 1990s
Source : http://www.witiger.com/marketing/plc.jpg
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GPM – Chapter 3
Innovative Products
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GPM – Chapter 3
PLC- Profits vs Sales
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GPM – Chapter 3 Kahoot
Success Factors in Global Procurement
Operations
1. Early Suppliers Involvement

(ESI)
2. Build a strong supplier base
3. Implement benchmarking
4. Explore outsourcing option
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GPM – Chapter 3
New Product Development Process
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GPM – Chapter 3
Purchasing Roles
in Product Development
1. Early Purchasing and Supplier Involvement
A. Opportunity to Review the design specifications
B. Define the product
✓ Design Tolerances
✓ Components Standardization
C. Develop Alternatives
✓ Optimum Order Sizes
✓ Process Changes in supplier’s manufacturing-early
preparations
✓ Packaging- Finished goods
✓ Inventory storage
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GPM – Chapter 3
Benefits of Early Supplier Involvement
Companies involving suppliers early in new
product development process were able to:
✓ reduce new product material costs by nearly 18%;
✓ improve access to innovative new products and more
stable supply;
✓ increase the accuracy of product costing;
✓ improve initial product quality by more than 20%;
and
✓ reduce time-to-market cycles for new products by
10% to 20%, allowing companies to capture greater
market share and profit margins for being an early
mover.
Source: Research by Aberdeen Group, March 2005
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GPM – Chapter 3
Benefits of Early Supplier Involvement
• Approximately 80 % of the manufacturing
cost of a product is determined by the
design of the product
(Clark and Fujimoto, 1991; Jaikumar, 1986; Ernst and Kamrad,
2000)
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GPM – Chapter 3
Food for thought !
How to ensure that suppliers do

not take advantage of you ?
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GPM – Chapter 3
Control Measures
➢ Make cost data sharing mandatory
➢ Scrutinize overhead calculations
➢ Analyze all assumptions of suppliers costing
➢ Agree on the right pricing terms; based on cost
plus and volume based
➢ Get agreement to Audit suppliers books and
compare estimated versus actual
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GPM – Chapter 3
2. Build Strong Suppliers Base
Good Suppliers Base can:
• Assist with product developments
• Inputs for Value Analysis ( eliminate waste)
• Prepare for Timely delivery of the desired
level of quality
• Facilitate the buyer’s efforts to gain
superior performance, extra service
• Cooperation on cost reduction
• Willingness to share in new processes and
procedures
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GPM – Chapter 3
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GPM – Chapter 3
Apple iPhone
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GPM – Chapter 3
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GPM – Chapter 3
❑ Choose suppliers carefully
How Dell ✓ Big suppliers, flexible and fast
manage ✓ Dell’s way or Highway
Suppliers ? ❑ Reduce number of suppliers

✓ Enough to cover market sweet
spot. 3 suppliers cover 98% vs
9 suppliers to cover 100%
❑ Let suppliers hold the inventory
✓ Dell only hold 2 hours
inventory, others are at
suppliers
❑ Get suppliers to store inventory
nearby
✓ Proximity pays
✓ Suppliers go where ever Dell
goes
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GPM – Chapter 3
3. Implement Benchmarking
✓ Benchmarking is the process of comparing one's business
processes and performance metrics to industry bests
and/or best practices from other industries.
✓ Dimensions typically measured are quality, time, and

cost. Improvements from learning mean doing things
better, faster, and cheaper.
(Source: en.wikipedia.org/wiki/Benchmarking)
✓ The term benchmarking was first used by cobblers

to measure people's feet for shoes. They would
place someone's foot on a "bench" and mark
it out to make the pattern for the shoes.
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Types of Benchmarking
1. Process benchmarking - Focus on business processes
with a goal of identifying and observing the best
practices from one or more benchmark firms.
2. Functional benchmarking - to improve the operation

of that particular function. Complex functions such
as Human Resources, Finance and Accounting and
Information and Communication Technology are
unlikely to be directly comparable in cost and
efficiency terms and may need to be disaggregated
into processes to make valid comparison.
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GPM – Chapter 3
Types of Benchmarking
3. Best-in-class benchmarking - involves studying the
leading competitor or the company that best carries
out a specific function.
4. Financial benchmarking - comparing the results in

an effort to assess your overall competitiveness and
productivity.
5. Performance benchmarking - allows the initiator

firm to assess their competitive position by
comparing products and services with those of target
firms.
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GPM – Chapter 3
Types of Activities that can be benchmark
(for manufacturing company)
✓ Internal processes, performance and people
✓ How many steps to complete a job (ex order response/
change)
✓ The performance of a machine e.g. rpm
✓ How many people needed in a purchasing department (PO
value/staff)
✓ Competitive activities, within a similar industry or
business
✓ Efficiency and effectiveness of a warehouse to deliver
goods to customer from order date
✓ Functional activities (yield rate, incoming quality,
defects)
✓ Speed__________________________________________
in exchange of goods (time taken)
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GPM – Chapter 3
Success Factors in Benchmarking
1. Dollar Value of the specific purchase must be
large as compared to the exercise
2. Product must be clear specification or service
is explicitly clear to buyer and seller
3. Market must consist of adequate number of
sellers
4. Sellers must be technically qualified and
activity want the contract
5. Sufficient time for sellers to evaluate bids
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GPM – Chapter 3
Non-Success Factors in Benchmarking
• Cost unable to estimate
➢ Defence industry building new equipment
• Price is not the only important criteria

➢ Quality or service is of equal importance
• Purchasing anticipation change in specification

➢ R & D Works
• Special Tooling or set-up Cost are major factors

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GPM – Chapter 3
Benchmarking Process
• Phase I
➢ Decides what to benchmark
➢ Collects and analyses data – current
situation
➢ Evaluates a monitor process on a
continual basis
➢ Gathers purchasing performance
benchmarking reports from selected
companies
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GPM – Chapter 3
• Phase II
➢ Identify the “best-in-class”
➢ “Best-In-Class” must be of compatible
organization
e.g. a bank’s purchasing management
will want to compare other bank’s
practice
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GPM – Chapter 3
• Phase III
➢ Visits to best practices sites.
➢ Each participant can judge how best to
use reports within the company
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GPM – Chapter 3
CAPS Research
Center for Advanced Procurement and Supply
http://www.capsresearch.org/
Procurement and Supply Management
Supply Chain Operation Reference (SCOR)

http://supply-chain.org/
Supply chain performance in general
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GPM – Chapter 3
4. Outsourcing as a Business Concept
Previously: (Olden days)

➢ mainly outsourcing of activities (operational)
➢ Trend to cut cost – short term
Currently:
➢ complete business functions are outsourced
➢ Viable business strategy-long term, strategic
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GPM – Chapter 3
Definitions and Concepts
Characteristics of Outsourcing:
✓ in-house performed activities are transferred
to a third party
✓ Assets, knowledge and sometimes employees
are send to the external party
✓ Extended and long term relationship
✓ Buyers from both parties experience new
costs and risk profiles
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Forms of Outsourcing Services
Labour outsourcing Mixed outsourcing Complete outsourcing
• Some employees Some or all of the • Employees
following: • Materials
• Employees • Process and
• Materials Systems
• Process and • Technology and
Contractor Systems Equipment
provides… • Technology and • Facilities
Equipment • Management/Su
Facilities pervision
Management/Sup
ervision
• Some employees Some or all of the • Program
• Materials following: management
• Process and • Employees
Systems • Materials
• Technology and • Process and
Host firm Equipment Systems
provides… • Facilities • Technology and
• Management/Supe Equipment Facilities
Management/Super
rvision vision
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GPM – Chapter 3
Types of Outsourcing
Offshoring: Offshoring relates to the
commissioning of work to a provider in a low cost
country. In many cases offshoring is concerned
with outsourcing of (IT) services.
Partial outsourcing: only a part of an integrated

function is outsourced. The coordination of the
function and activities still lies with the client
(the buyer). Here a major problem is of course how
to demarcate the responsibility between the
parties involved.
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GPM – Chapter 3
Types of Outsourcing
Turnkey outsourcing: applies when the
responsibility for the execution of the entire
function (or activities) lies with the external
provider. This includes not only the execution of
the activities, but also the coordination of these
activities.
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Advantages Disadvantages
Turnkey Buyer has minimal responsibility for The buyer has limited influence on the
outsourcing outsourced processes determination of the price and little insight in
cost structure of provider
Buyer doesn’t need to have experience
with similar projects Buyer has limited influence on the staff,
technology and materials used and their quality
The project generally goes smooth for the
buyer Large dependence of buyer on provider
resulting in high commercial, technical and
performance risks
Partial The buyer has more influence on prices, Buyer is required to have knowledge of the
outsourcing rates and costs separate parts of the outsourced function/
activities
The buyer has more influence on the staff,
technology and materials used and their The buyer is required to have the
quality organizational capabilities to coordinate and
integrate the outsourced function / activities
Specific advantages can result in cost
reductions Communication and coordination problems
between parties involved can be a cause of
__________________________________________delay and disappointment
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GPM – Chapter 3
Reasons for Outsourcing
Strategic Improve company focus
1.
reasons for 2. Gain access to world class capabilities
outsourcing 3. Get access to resources that are not available
internally
4. Accelerate reengineering benefits
5. Improve customer satisfaction
6. Increase flexibility
7. Sharing risks
Tactical 1. Reduce control costs and operating costs
reasons for 2. Free up internal resources
outsourcing 3. Receive an important cash infusion
4. Improve performance
5. Ability to manage functions that are out of
control
All these reasons underlie one overall objective: to improve the overall
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performance of the outsourcing firm
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GPM – Chapter 3
Outsourcing - How to Decide?
High
Maintain / invest (opportunistically) In-house / invest
Competencies are not strategic Competencies are strategic and

but provide important advantages; world-class;
Level of competitiveness
relative to suppliers
keep in-house as long these focus on investments in technology

advantages are (integrally) real and people; maximize scale and
stay on leading edge
Outsource Collaborate / maintain control
Competencies have
no competitive advantage Competencies are strategic but
insufficient to compete effectively;
explore alternatives such as
partnership, alliance, joint-venture,
licensing, etc.
Low
Low Strategic importance of competence High
(non-core) (core)
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GPM – Chapter 3
Advantages and Disadvantages of Outsourcing
Advantages Disadvantages
Freeing up of cash: investments can be Increased dependence on suppliers

concentrated on core activities
Optimal usage of knowledge, equipment Continuous follow-up and monitoring of the
and experience of third party supplier relationship necessary
Increased flexibility: fluctuations in the Risks of communication and organizational
workload can more easily be absorbed problems during the transfer of activities to a
third party
Outsourcing leads to easier and more Risks of leakage of confidential information
focused primary processes in the
organization
Input through an independent party’s point Performance incentives and penalties
of view which reduces the risks of introvert
short-sightedness in the organization
Risk of losing essential strategic knowledge
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GPM – Chapter 3
Successes in Outsourcing
✓ Lyons (2001): 76% of outsourcers rate their
outsourcing as good or extremely good.
✓ Gartner (2003): Satisfaction with the business
benefits from outsourcing contracts fell from 86
percent in 2001 to 50 percent in 2002 among
executives in Europe.
✓ Monczka e.a (2005): reported that 9 to 31
percent of the companies reported that
outsourcing initiatives were falling short of
their expectations and goals.
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The Outsourcing Process
Three phases:
❖ Strategic phase (why, what, who?)
❖ Transition phase (how?)
❖ Operational phase (how to control?)
Strategic phase Transition phase Operational phase
Figure 8.4
Competence Assessment Contract Project execution Managing Contract
analysis & approval negotiation & transfer relationship termination
Adapted from Momme, 2002

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GPM – Chapter 3
Strategic Phase
1. Motives for outsourcing
✓ Focus on core competences
✓ Focus on cost efficiency/ effectiveness
✓ Focus on service
2. Which activities or functions are outsourced
✓ Transaction cost approach
✓ Core competence approach
3. Qualifications of the supplier
✓ Technical and managerial qualities to
achieve demanded level of performance
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GPM – Chapter 3
The Transition Phase
1. Contract Negotiation
✓ Contract forms a legal basis for relationship
✓ Contracts depends on characteristics of
outsourced activity
✓ The contract type has a great impact on the
success of the joint operation
2. Project Execution and Transfer

✓ Outsourcing transition can be very complex
✓ The transfer should be conducted using
project management principles
✓ Test phase before going ‘life’
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GPM – Chapter 3
The Transition Phase
The type of contract is just one of many
issues to be discussed. Other ‘ingredients’
in an outsourcing agreement are:
✓ The scope of the service
✓ Terms of agreement
✓ Rates, fees, incentives
✓ Termination plan
✓ Conflict resolution
✓ Communication
✓ Management and control
✓ Other (warranty, confidentiality etc.)
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GPM – Chapter 3
The Operational Phase
❑ It is in the operational phase that the outsourcing will
deliver its expected results
❑ Successful outsourcing depends heavily on close
cooperation with the supplier
❑ McQuiston (2000) identifies 6 core values as being
critical to a successful outsourcing relationship
Core values Supporting factors

▪ Shared goals and objectives • Developing a personal relationship
▪ Mutual dependence • Having professional respect
▪ Open lines for communication • Investment of effort by top
▪ Concern for the other’s profitability management
▪ Mutual commitment to customer • Commitment to continuous
satisfaction improvement
▪ Trust
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GPM – Chapter 3
Risk Assessment
In cases where trust and interpersonal relationships are
not present, parties try to arrange for dealing with these
risks and uncertainties by detailed outsourcing contracts
These contracts are associated with the following kinds of

risks:
✓ Technical risks: related to the extent to which the

supplier is able to provide the desired functionality
and performance
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GPM – Chapter 3
Risk Assessment
These contracts are associated with the following kinds of
risks:
✓ Commercial risk: related to the uncertainty with
regard to the price we will pay and the costs that we
will incur when having outsourced our activities to
the supplier
✓ Contractual risks: e.g. does the contract in sufficient
detail describe the performance that is expected from
the supplier?
✓ Performance risks: related to the chance that the
supplier is not capable of doing the job he was hired
for.
Trust and Partnership are more important to solve the

problem.
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GPM – Chapter 3
Critical Success Factors of Outsourcing
1. Understanding company goals and objectives
2. A strategic vision and plan
3. Selecting the right vendor
4. A properly structured contract
5. Open communication with the individual
groups involved
6. Ongoing management of the relationship
7. Senior executive support and involvement
8. Careful attention to personnel issues
9. The way the company is strategically
positioned vis-à-vis its supplier. Can it still
exert__________________________________________
some control over its supplier, or not?
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GPM – Chapter 3
Conclusions
➢ Outsourcing has become very popular as a
business strategy in many industries around the
world.
➢ The new strategy involves the decision to move
an activity, that was conducted in house, to an
outside provider.
➢ A careful outsourcing process is crucial for its
success.
➢ The outsourcing strategy should be in line with
the overall corporate strategy.
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GPM – Chapter 3
Questions ?
tomsim@singnet.com.sg
Prepared & Edited by Thomas SIM – June 2019
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GPM – Chapter 3
Thomas Sim
tomsim@singnet.com.sg
Prepared & edited by Thomas SIM – June 2019
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48

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GPM – Chapter 3

Success Factors in Global Procurement

1. Early Suppliers Involvement

Benefits of Early Supplier Involvement

Benefits of Early Supplier Involvement

How to ensure that suppliers do

2. Build Strong Suppliers Base

Suppliers ? ❑ Reduce number of suppliers

✓ Dimensions typically measured are quality, time, and

✓ The term benchmarking was first used by cobblers

2. Functional benchmarking - to improve the operation

4. Financial benchmarking - comparing the results in

5. Performance benchmarking - allows the initiator

Success Factors in Benchmarking

Non-Success Factors in Benchmarking

• Price is not the only important criteria

• Purchasing anticipation change in specification

• Special Tooling or set-up Cost are major factors

Supply Chain Operation Reference (SCOR)

Supply chain performance in general

Previously: (Olden days)

Definitions and Concepts

Partial outsourcing: only a part of an integrated

Competencies are not strategic Competencies are strategic and

keep in-house as long these focus on investments in technology

Advantages and Disadvantages of Outsourcing

Freeing up of cash: investments can be Increased dependence on suppliers

Strategic phase Transition phase Operational phase

Adapted from Momme, 2002

The Transition Phase

2. Project Execution and Transfer

The Transition Phase

Core values Supporting factors

These contracts are associated with the following kinds of

✓ Technical risks: related to the extent to which the

Trust and Partnership are more important to solve the

Critical Success Factors of Outsourcing

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