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 purchasing’s 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
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 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
Suppliers Performance
• 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 Firm’s
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
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 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
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 Developing Successful Sourcing
Strategies- Cont.
The following is a framework for supply chain strategy
development:

Step 1 The firm’s 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
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 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 supplier’s 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
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 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
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 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
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 Supplier Management and Alliance
Development
Alliance development, an extension of supplier development refers
to increasing a key or strategic supplier’s 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 firm’s second-tier
suppliers, as the firm’s 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
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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
1
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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
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 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 organization’s 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
1
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 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
1
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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
1
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 Using Third-Party Supply Chain
Management Services
Third-party logistics (3PL) & other supply chain service providers are growing
and may involve a firm’s 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
1
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Assessing and Improving the Firm’s
Purchasing Function
The purchasing function is one of the most value-enhancing functions
in any organization, preferable to periodically monitor the purchasing
function’s 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
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 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
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