CHAPTER 4- STRATEGIC SOURCING

FOR SUCCESFUL SUPPLY CHAIN

MANAGEMENT

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

 Learning Objectives

You should be able to:

Describe how strategic sourcing plans are developed &
implemented.
Describe the various strategic sourcing activities.
Describe purchasings role in managing key supplier relationships.
Describe performance criteria used to assess suppliers.
Describe how strategic supplier relationships impact the firm.
Describe how a reverse auction works.
Understand the importance of sharing benefits of strategic
partnerships.
Understand the strategic role played by the purchasing function in
developing and improving the supply chain.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
2
 Chapter Four Outline
Developing Successful Sourcing Managing & Developing 2nd-
Strategies Tier Supplier Relationships
Supply Base Reduction Use of e-Procurement Systems
Programs
Rewarding Supplier
Evaluating & Selecting Key
Performance
Suppliers
Strategic Alliance & Supplier Benchmarking Successful
Certification Programs sourcing Practices
Outsourcing Programs Using Third-Party Supply Chain
Early Supplier Involvement Management Services
Supplier Management & Assessing & Improving Firms
Alliance Purchasing Function

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
3
 Introduction
Drivers of Strategic Sourcing

Reduce costs and delivery cycle times

Improve quality and long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce high costs of globalization and materials,
Deliver more innovative products more frequently & cheaply than
competitors

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
4
 Developing Successful Sourcing
Strategies
Successful Sourcing Strategies are different for
functional products and for innovative products.
Functional Products are MRO items and other commonly
low profit margins with relatively stable demands and
high levels of competition.
Innovative Products are characterized by short product
life cycles, volatile demand, high profit margins, and
relatively less competition.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
5
 Developing Successful Sourcing
Strategies- Cont.
The following is a framework for supply chain strategy
development:

Step 1 The firms suppliers are classified as belonging either to

the innovative or functional category.
Step 2 The goals and strategies of the inbound portion of the
supply chain are developed.
Step 3 Supply chain capabilities are evaluated & compared to
required performance.
Step 4 Set goals for improving capabilities.
Step 5 Implement work plan.
Step 6 Monitor progress & adjust the work plans.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
6
 Developing Successful Sourcing
Strategies- Cont.
Supply Chain Sourcing Strategy Framework

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
7
 Supply Base Reduction Programs

Supply base reduction is most often the initial supply

chain management effort.

Buyer-supplier partnerships are easier with a reduced

supply base.

Supply base reduction results in:

Reduced purchase prices
Fewer supplier management problems
Closer and more frequent interaction between buyer and
supplier
Greater levels of quality and delivery reliability.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
8
 Evaluating & Selecting Key
Suppliers
When evaluating suppliers to be used in a strategic
partnering, purchase cost becomes relatively less
important.

Key Supplier Selection is conducted by a cross

functional team selection approach wherein
purchasing staff, primary users, product designers,
and manufacturing personnel participate.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
9
 Strategic Alliance and Supplier
Certification Programs
Supplier certification programs are one way to
identify strategic alliance candidates. Firms often
develop their own formal certification programs, &
most require ISO 9000 or similar certifications as one
part of the certification process.

A site audit using a cross-functional team to identify

a suppliers process capabilities, materials and
methods monitors base-line management practices.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
10
 Outsourcing Programs

Outsourcing allows a firm to:

Concentrate on core capabilities
Reduce staffing levels
Accelerate reengineering efforts
Reduce management problems
Improve manufacturing flexibility.

Risks associated with outsourcing, include

Loss of control
Increased need for supplier management
Increased reliance on the supplier.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
11
 Early Supplier Involvement

Early supplier involvement (ESI) is perhaps one of the

most effective supply chain integrative techniques.

Under ESI, key suppliers become more involved in the internal

operations of the firm, particularly with respect to new product and
process design concurrent engineering and design for
manufacturability techniques.

Value engineering activities help the firm to reduce cost, improve

quality, and reduce new product development time.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
12
 Supplier Management and Alliance
Development
Alliance development, an extension of supplier development refers
to increasing a key or strategic suppliers capabilities.

Supplier alliances result in better market penetration access to new

technologies and knowledge, and higher return on investment than
competitors with no such strategic alliances.

Alliance development will eventually even extend to a firms second-tier

suppliers, as the firms key suppliers begin to form their own alliances.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
13
Managing & Developing Second-Tier
Supplier Relationships
Successful alliance development can indirectly
create successful, high-performing second-tier
& third-tier relationships.

Organizations may require direct suppliers to

acquire goods and services from specific
suppliers and under specific conditions. They
can also work directly with supplier alliance
partners in solving second-tier supplier
problems, designing supplier selection and
certification programs.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
14
Managing & Developing Second-Tier
Supplier Relationships- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
15
 Use of e-Procurement Systems

Primary benefits of e-procurement include:

Cost savings
Free-up time to concentrate on core business
E-procurement systems enable the concentration of a large
volume of small purchases with a few suppliers in electronic
catalogues, which are made available to the organizations users.

Reverse auctions- suppliers enter Web site. At a pre-designated

time and date, qualified suppliers try to underbid their competitors and
can monitor the bid prices until the session is over.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
16
 Rewarding Supplier Performance

Rewarding suppliers provides an incentive to surpass

performance goals.

Punishment, a negative reward, may reduce future business; or a bill-

back amount equal to the incremental costs resulting from a late
delivery or poor quality.

Strategic supplier agreements allow suppliers to

A share of the cost reductions
More business and/or longer contracts
Access to in-house training seminars and other resources
Company and public recognition

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
17
Benchmarking Successful Sourcing
Practices
Benchmarking
An effective way to improve supply chain
performance. Benchmarking data regarding sourcing
practices can be obtained in any number of ways,
both formal and informal.

Resources are available to learn about and implement

sourcing practices:
The Center for Advanced Purchasing Studies.
Supply-Chain Council.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
18
 Using Third-Party Supply Chain
Management Services
Third-party logistics (3PL) & other supply chain service providers are growing
and may involve a firms sourcing, materials management, and product
distribution responsibilities.

These 3PL charge a fee for services while saving costs (estimated at 10 to 20%
of total logistics costs); and improving service, quality, and profits for their
clients.

Vendor-managed inventory (VMI)

services is one of the more
popular roles of 3PL.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
19
Assessing and Improving the Firms
Purchasing Function
The purchasing function is one of the most value-enhancing functions
in any organization, preferable to periodically monitor the purchasing
functions performance against set standards, goals, and/or industry
benchmarks.

Surveys or audits can be administered as self-assessments among

purchasing staff as part of the annual evaluation process.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
20
 Supplier Relationship Management
Software
Skill set requirements of purchasing professionals
have been changing. Purchasing personnel must
today exhibit world-class skills such as:
1. Interpersonal communication 6. Customer focus
2. Ability to make decisions 7. Ability to manage change
3. Ability to work in teams 8. Influencing & persuasion
4. Analytical skills skills
5. Negotiation skills 9. Strategic skills
10. Understanding business
conditions

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
21