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SUPPLY MANAGEMENT (CUSCM208)

Strategic Sourcing
Overview

Learning Objectives
Introduction
Strategic Supply Best Practises
The Buy decision
 Kralijic model
Global, single and multiple sourcing
Conclusion
Learning Objectives
To explain the various sourcing
strategies
To apply the Kralijic model when
sourcing
To compare and contrast the
sourcing strategies
Introduction
WHAT DOES “BEST PRACTICE” MEAN?

Best Practice is defined as:

“A management idea which asserts that there is a :

technique, method, process, activity, incentive or reward

that is more effective at delivering a particular DESIRED


OUTCOME than any other :

technique, method, process, activity, incentive or reward”


Setting Strategic Sourcing Strategies

The first sourcing decision for each item is


whether to make it or buy it.
The decision should take into account a
long-term business strategy, core
competencies, the capabilities of optional
supply sources, total ownership cost, and
quality implications associated with internal
versus external sourcing.
Internal sources should be held
accountable to the same supplier
certification criteria established in the
supplier service policy.
The Buy Decision
Total Acquisition Cost (TAC) Analysis
A variety of factors should be used in
selecting an external supplier .the most
important is the total acquisition cost (TAC).
 TAC analysis goes well beyond traditional
unit purchase cost considerations to include
the cost of inbound transportation, inventory
carrying ,
warehousing, international logistics fees, and
the cost of poor quality.
 The TAC should be computed and compared
for each item for all sourcing alternatives.
Continued
TAC analysis is especially
important when considering
global sourcing alternatives
where a low unit purchase cost
may be offered but is more than
offset by high transportation, lost
sales, inventory carrying, and
international logistics costs.
The Buy decision -SOURCING
STRATEGIES
An organisation can organise its supply process using a
variety of sourcing strategies.
The choice of these different approaches is contingent
upon a variety of factors, such as the importance of a
good or service to the firm and the competitiveness of the
supply marketplace.
Organisations must also consider the technical
complexity of the product.
To help Buyers formulate appropriate sourcing and
competitive strategies, Kraljic (1983) developed a simple
positioning matrix based on these factors.
 Every Purchasing department and consultancy firm uses
this matrix today and it is the main strategic positioning
tool for thinking about supply management decisions.
Kraljicidentified four key purchasing approaches or
strategies that selecting the best supply strategy is
a function of the level of supply
exposure, technical risk and the strategic nature of
the product or service (i.e. its value or cost to the
buying firm). ,also maps the type of products and
services supplied (also known as ‘sourcing groups)
to particular sourcing strategies.
Despite its age, Kraljic’s matrix remains central to
many purchasing and supply strategies, testament
to the foresight shown by its author.
The article was similarly foresighted, entitled
‘Purchasing Must Become Supply Management’, and
published in the Harvard Business Review in 1983.
Kraljic Matrix
Strategy 1: Routine. This strategy is aimed at a
spend category known as routine items. The
recommended approach here is to follow a strategy based
on efficiency.
 This quadrant contains products or services of low value or
cost
and low technical or supply risk.
 The recommendation is that these should be sourced from
the most efficient suppliers.
 Examples of low-level parts or commodity products include
nuts, bolts or rivets in manufacturing or an administrative
item such as stationery or low-level temporary labour.
 The objective is to pay the most competitive price for the
product, whilst maintaining delivery and quality standards.
As switching costs are low and the market is highly
competitive,buyers would negotiate on price.
Strategy 2: Bottleneck. This strategy is aimed at
the spend category known as bottleneck items.
These are items that can seriously affect the delivery of
the buyer firm’s product or service.
They tend to be relatively low value but are relatively
rare in terms of the supply market. A good example of
this may be computer chips
These don’t cost a great deal compared to the total unit
price, but they are essential to the running of the
product.
Here the strategy is to maintain supply continuity by, for
example, establishing long-term contracts containing
liquidated damages clauses. The buyer will tend to focus
on total cost rather
than simply on purchase price.
Strategy 3: Leverage. This strategy is
aimed at the spend category known as
leverage.
The focus of this strategy is to obtain the best
deal possible. This strategy occurs when the
buyer perceives market exposure to be low yet
the cost or value of the item is high (e.g. foam
for car seats at an automotive assembler).
The buyer can obtain the best deal by using
‘leverage’ strategies (Porter, 1980) where the
buyer power is high and the supplier power is
low.
....Continued
Leveraging involves pulling together a range of
similar products – sometimes the same product
bought at different locations throughout the
organisation – to increase contract size and aslo
increasing the buyers bargaining power.
 An automotive manufacturer might source two
models of car seat using a single supplier rather
than multiple suppliers.
This may achieve economies of scale for the
buyer, providing a stronger negotiation position.
Firms pursuing a cost reduction strategy
consistently follow this strategy.
 Strategy 4: Critical. This strategy is
aimed at the spending category known as
critical.
The suggested strategy for buyers in this
quadrant is ‘cooperation’, because these
suppliers are both high risk and can have a
high impact on the buyer firm’s profitability.
Suppliers that fall into this segment of the
model provide products or services which are
characterised by high supply risk and having a
high impact on the business in terms of value
or cost.
 These suppliers tend to fall into the Pareto rule (80/20 )
that is, the top 20 per cent of suppliers
account for 80 per cent of the cost.
 These are firms’ strategic suppliers. Examples include
modular assembly suppliers (e.g. first-tier suppliers),
key technology suppliers and major outsourcing providers
(e.g. mega providers of information
technology services). These relationships tend to be single
or sole sourced due to the large amount of investment
required; switching costs are generally very high, with
mutual dependencies.
They need to be managed very carefully since they are
often long-term and the focus tends to be on collaboration
and mutual development, as opposed to price reduction
and short-term aggressive strategies.
These relationships tend to be single or
sole sourced due to the large amount of
investment required; switching costs
are generally very high, with mutual
dependencies.
They need to be managed very
carefully since they are often long-term
and the focus tends to be on
collaboration and mutual development,
as opposed to price reduction and
short-term aggressive strategies.
Global sourcing

Why global global sourcing ?


Limited domestic labor availability, high domestic labor
costs, domestic demand for a great variety of unique
products, global communication systems availability,
low trade barriers, increasing sophistication and
capability of international suppliers, and developing
pockets of production expertise unique to specific world
regions have led to the need for all corporations to
create global sourcing strategies.
Global sourcing strategies have paid big dividends for a
number of U.S. corporations. Nike, with 100 percent
global sourcing, is probably the best U.S. example. to
be in place.
 Unfortunately, many U.S. Companies have
gone too far toward global sourcing,
overlooking the benefits of domestic
sourcing including shorter in-transit times,
lower transportation costs, lower inventory
levels, and rapid and reliable
communications.
A balanced sourcing strategy employing an
optimal mix of global and domestic sources
based on the total acquisition cost, global
business strategy, and high-level sourcing
policies should be in place.
Within multiple sourcing a decision must be
made on how to divide the order between the
various sources. This allocation could be static
(a fixed amount per source), semi-static (a
fixed percentage, every other order, decided
by a lottery), dynamic (decided in a mini-
competition, depending on previous
performance, etc.) or a combination of the
above (Aissaoui, Haoauri & Hassini, 2006).
Most of the arguments to follow apply to all
forms of allocation, be it a one-time allocation
(as most static rules require) or a continuous
allocation process (in dynamic allocations).
Single Sourcing
This structure characterises a buyer with only one source of supply
for a particular
good or service,
 It may be the result of a deliberate choice by the Buyer, perhaps
because of the high cost of the item or its strategic to the end
product. Alternatively it may occur because the final customer has
explicitly required the firm to work with a particular sub-supplier’s
product in the completed product.
For example, many customers of personal computers demand the
Windows Operating System, thereby forcing manufacturers to source
exclusively from Microsoft.
There may also be only one source of supply
 According to the Kraljic strategic positioning model, this sourcing
strategy is likely to be prevalent in either the critical or bottleneck
quadrants of the model. While single sourcing may appearto have
negative connotations, there are advantages to managing this type
of sourcing
Discussion
Explain the merits and demerits of Single
sourcing
Merits
Improved bargaining power to reduce costs
Decreased effort to track supplier
performance and manage relationships
Improved innovation and design
collaboration
Improved plan synchronization and
information exchange
Improved supplier responsiveness
Multiple Sourcing
 Multiple sourcing describes securing multiple supply
sources to supply the product or service, with many
suppliers guaranteeing a market price for the good
or service.
 The structure is often used to maintain competition
in a given supply market.
 The Buyer will have a range of suppliers to choose
from, and will carefully balance capacity constraints
with individual supplier performance when placing
orders.
 The old adage, ‘don’t put all your eggs in one
basket’, is often used to describe this supply
structure
 This is often viewed as an adversarial approach and
prevails in marketplaces where there are a high
 degree of competition, low switching costs and low
levels of technological competence.
 This structure would tend to appear in the ‘Routine’
quadrant of the
 strategic positioning matrix and applies to the low-
level type of purchase.
 Buyers using this structure will tend to focus on
purchase price rather than total cost.
 This approach maintains continuity of supply in the
short term, whilst enabling the buyer to achieve
price reductions.
Class Activity
Discuss the merits and demerits
of Multiple sourcing
THE SUPPLIER PREFERENCING
MODEL
The Supplier Preferencing Model
illustrate the supplier’s
perspective on how attractive it is
to a supplier to deal with a buyer
and the monetary value of the
buyer’s business to the supplier
SUPPLIER PREFERENCING MODEL
SUPPLIER PREFERENCING MODEL
 Nuisance customers are neither attractive
nor valuable to do business with.
Suppliers practising customer relation
management will regularly review their
customer base and downgrade or cease
service to unprofitable customers – or raise
their prices in such a way to turn them into
exploitable customers
 Exploitable customers offer large volume of
business, which compensates for lack of
attractiveness. The supplier will fulfil the terms
of the supply contract – but will not go out of
its way to provide extras
SUPPLIER PREFERENCING MODEL
 Development customers are attractive,
despite currently low levels.
The supplier may see potential to grow
the account and may go an extra mile in
fulfilling contracts.
If all goes well, the customer may be
converted to ‘core’ status
 Core customers are highly desirable and
valuable for suppliers, who will want to
establish long term mutual profitable
relationships
SUPPLIER PREFERENCING MODEL
This is a useful model for supplier
relationship management,
because it suggest that in order
to get the best from suppliers, a
buyer needs to maintain its
attractive customer status
References
Happeck, S., (2005). Supply Chain Strategy: The
importance of aligning your strategies. UPS Supply Chain
Solutions www.ups-scs.com/solutions/white_papers/wp_
supply_chain.pdf

Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E., (2009).


Designing and Managing the Supply Chain. Mcgraw Hill,
Boston

https://procurementmanagement.pressbooks.com/chapter/su
pplier-selection-and-evaluation/
http://www-
personal.umich.edu/~dbeil/Supplier_Selection_Beil-
EORMS.pdf
http://www.pwc.no/no/publikasjoner/pwc-supplier-
relationship-management.pdf