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SOURCING

Chapter 13

product design collaboration. procurement & supplier evaluation . design of supplier contracts.Role of Sourcing • • • • Sourcing is the entire set of processes required to purchase goods & services Purchasing is the process by which company acquire goods & services from suppliers to execute their operation Sourcing became more important after companies gave up their vertical integration Sourcing include selection of supplier.

Benefits of Sourcing • Effective sourcing processes improve. • • Profits for the firm Total SC surplus in a variety of ways • Economies of Scale due to demand aggregation • Design collaboration to produce simple products which lead to low manufacturing cost • Efficient procurement transactions to reduce cost • Coordination with supplier to match demand & supply • Appropriate contract leading to sharing the SC risk • Decrease supplier profit due to competition by use of bids .

lot size.Supplier Scoring & Assessment • • • Suppliers are selected based upon price & other factors like LT. Quality etc Supplier performance must be rated on each of these factors based upon the weights assigned by management Supplier performance should be compared based on their impact on total cost . reliability. flexibility.exchange rates.

dealers or stockists Investment also done with suppliers developing products for company . auctions or direct negotiations Single or multiple sourcing done from OEM. suppliers are selected using a variety of ways like bids.Supplier Selection & Contracts • • • After scorecard analysis.

improve quality & eliminate info distortion It should share the associate risks of deal.Contract Development • • • • • A contract should increase profit for firm & SC. for firm as well as contractor Contain all necessary information & list solution for all possible scenarios in future Explicitly state acceptance criteria for the product along with methodology of QC test Help to build relationship with supplier .

at an agreed price • Reduce retailer risk but lead to surplus inventory • Markdown allowance from manufacturer to retailer helps to reduce this surplus • SC will work upon demand from retailer not end consumer • Retailer order will be based upon consumption and also on cost of under/over stocking .Types of Contract Buy back or Returns Contracts • Allows a retailer to return unsold inventory up to a specified amount.

SM).expected overstock at retailer  .Buy Back Contract    C= Wholesale price b=buy back price V=production cost SM = Salvage value or SM = b O*= Optimal order qty Expected Mfr Profit (EMP)= Initial Profit – Loss from returns  EMP= O*(C-V) – (b .

best suited for low cost products with high return cost • They increase information distortion & lead to a lower retailer effort • Sophisticated information network is required to measure retail sales instead of retail orders .Types of Contract Revenue Sharing Contract (RSC) • Buyer pays min amount & shares revenue with the supplier (reduce his cost of overstocking) • These contracts increases the product availability & the SC profit • No product is returned (like buy-back).

expected o/stock at retailer  ERP= (1-f). b=buy back price V=production cost SM = Salvage value or SM = b O*= Optimal order qty Cu = (1-f).Revenue Sharing Contract   P= Retail price.expected o/stock at retailer)+SR. Co=  EMP= Initial Profit – Loss from returns  EMP= O*(C-V) – (b .P(O*.P – C. C= Wholesale price.SM).CO*  .

but also result into lower retail efforts due to low risk .Quantity flexibility Contracts • • Allows the buyer to modify order (within specified limits) as demand changes It is ideal for a supplier delivering to many retailers with independent demands • • Results into better match of supply & demand Utilization of dedicated and flexible capacity • • • Preferred for products with high marginal costs or where surplus capacity is available It requires the retailer to have good market intelligence and excellent forecasts It has relatively lesser information distortion.

g car dealer Encourages the dealer to try and reach higher thresholds Demand variability also increases by large margin Information distortion is common especially in last periods • Offering incentive over a rolling horizon can solve the problem .Contracts to Increase Agent Efforts • • • • SC profits are linked to agents efforts. agent profit based upon sales e.

reduce LT etc Effective in aligning supplier & buyer incentives when supplier is required to improve along a particular dimension • • However.Contracts to Induce Performance Improvement • • • Most suitable in SC with less buyer power Encourage supplier to improve quality. benefits accrued by buyer Shared savings contract is one example .

Ford tractors and computer industry etc . LT. operation & customer desires • Examples of auto-manufacturer like Toyota. high quality & better integration with supplier • • Inventory & distribution cost decrease Product design is improved for cost.Design Collaboration--(DC) • • 50-70% of manufacturer spending goes in procurement. 80% of cost of purchased part is fixed during the design phase DC lowers cost.

low logistic cost Classified into three categories Bulk purchase.Procurement Process • • • Begins with buyer placing the order & end with buyer receiving and paying for order Two types of purchased goods.Used to make finished good • • • • • Firms focus on coordination and visibility with supplier Consolidation of orders lead to EOS. Critical items (special items with long lead times) & Strategic items Firms focus on reducing transaction costs by consolidating demand to negotiate purchase discount . Direct material:.

thread etc • Firms focus on expanding sourcing network to find best VALUED alternative .Procurement Process • • • Indirect material:. lubricants.g. grease.Used to support firm operation These are low value products with high transaction costs Orders consolidated to reduce transaction costs • • • Generally indirect materials are low value and high consumption products Consolidation leads to low Tpt costs as well E.

steady orders independent of demand---base demand Flexible source is given small orders that fluctuate with demand----for variation in demand . • • • Achieve supplier EOQ’s.Sourcing Planning & Analysis • • Firms must analyze their procurement spending and supplier performance Evaluate & manage supplier portfolio to. Volume discounts Reliability of support in future Flexibility to production • • Low cost suppliers are given large.

Making Sourcing Decision in Practice • • • • Use multifunctional teams Ensure appropriate coordination across regions and business units Always evaluate total cost of ownership Build long term relationships with key suppliers .