Agenda

 Supply Chain Management

corporate Outsourcing
 The Decision to Make or Buy

 It is becoming more common for firms to outsource activities

previously done in-house This increases the firm’s flexibility
allowing them to focus on their core activities
Reasons to Make
Small quantities
Unusual quality
requirements
 Preserve
technological secrets
Obtain lower cost
Minimize idle equipment
 Avoid sole-source
dependency
 Pride
Reasons to Buy
 Lack administrative or
technical experience
in production
 Reputation of suppliers
 More flexibility of
sources and substitutes
 Hard to reverse
decisions if you decide
to make
 Acquisition requires
less overhead
Gray Zone in Make
or Buy
Range of options where
not every situation leads
to a 100% make or 100% buy
option
This may be useful when
testing new products
 There is no commitment to

make or buy
Subcontracting
 Subcontracting occurs
when primary contractors
contract part of
their work to other
contractors
 Beneficial when orders
take a long period of
time, are extremely
costly, or when work is
difficult to define
Outsourcing
To Make or not to Make?
 Gained prominence in 90s
 Public and Private Orgs outsourcing
wide range of functions

 IS

 Mail Rooms

 Corporate Travel

 Logistics
 Why Outsource?
1995 1998
Cost Reduction Reduce and control operating costs

Head-Count Reduction Improve company focus

Focus on Core Competencies Gain access to world-class capabilities

Acquire and deploy peripheral knowledge Free internal resources for other purposes
or process technology

Minimize inventory and materials handling Resources are not available internally
Reduce development and production cycle Accelerate reengineering benefits
times

Improve efficiency Function difficult to manage/out of control

Reaction to positive media reports Make capital funds available

Share risks

Cash infusion

Risks
 Loss of control
 Higher exit barriers

 Exposure to supplier

risks
 Unexpected fees
 Conversion costs

 Supply restraints Unions

Outsourcing Purchasing
Little outsourcing of Supply Activities
 Logistics tasks and functions widely
outsourced
 Decision Making

 Matrix

 Flowchart

 Supply managers- add value to

decision
Trends Impacting
Supply Management
Strategy
Globalization
IT
External customer focus
 Product/Process technology
Increasing job complexity

 Environmental/Legal issues
 Reengineering
The Matching
Game:
To Make or to Buy
Purchaser-Supplier
Relations
Driving force in the
trend toward use of the
term supply management
 Buyer-Supplier goodwill
should be cultivated
 Progressive
companies measure
supplier goodwill
on a regular basis
Purchaser-Supplier
Satisfaction Model
Complete

satisfaction

0, 10

(0,5)(10,5)
Mariginal
satisfaction
(0,0) (10,0) Total Marginal Complete
dissatisfaction satisfaction
satisfaction
PURCHASER'S SATISFACTION

Tools and
Techniques
for Moving
Positions
Crunch Tools -
Negative measures to
shift satisfaction
levels
Complete severance of
purchases without
 Refusal to accept shipments Use or
threat of legal action

Stroking Techniques - Positive measures

to shift satisfaction level
 Long-run commitment contracts
 Sharing of internal information
 Evidence of willingness to work toward
changed behaviour in purchasing
organization
 Rapid positive response to requests
from suppliers
Purchaser-Supplier
Relationship
Management
Framework underlines need for extensive
communications for both parties
Requires substantial coordination work
inside purchaser's organization
Team approach to long-term supplier
relations only reasonable option
 Immediate, concerted action needs to be
taken when either side sees problems or
opportunities
 Seller's and purchaser's personnel need
to understand own organizations as well
as other's well
 Suppliers also need to develop
effective working relationships
internally

Types of Suppliers
 Unacceptable suppliers
 Acceptable suppliers
Good suppliers
 Preferred suppliers
 Exceptional suppliers
Single Source
Relationships
Must Add Value
Beware of:
Excessive charges Low
quality
Poor delivery
 Lack of continuing
improvement programs

Value is ultimate long-term

like cycle costs and
benefits.
Relationship
Buyer-Supplier
Traditional Partnership
Lowest price Total cost of ownership
Specification-driven •End customer-driven

Short term, reacts to marketLong term

Trouble avoidance Opportunity maximization
Purchasing's responsibility Cross-functional
teams
and top
Tactical management involvement

Little sharing of information on Strategic both

sides Both supplier and buyer share short and
long term plans
Share risk and opportunity
Standardization Joint ventures Share data
The Developmental
Path to Pa
rtnership
Partnering
Strategies and
Outcomes
Strategies 4. Increased averaae
1. Decreased average contract /
delivery lot size length agreement
2. Decreased total 5. Increased average
number or suppliers frequency of delivery
3. Decreased number of to the plant
sources used per 6. Increased
purchased item involvement
supplier in
quality certification
programs Outcomes
1. Improved quality of changes to the agreed-
thesupplier's operations to delivery date
/ processes
2. Improved quality of
incoming goods
3. Decreased supplier's
total cost
4. Decreased buying
organization's total
cost
5. supplier's
ability
Improved to handle
buyer-initiated
changes to the agreed-
to delivery date
6. Improved buyer's
ability to handle
supplier-initiated
The Clock
Game
Reverse
Marketing/SuppIier
Development
 When no suitable
supplier exists,
purchaser must
create one
 For Reverse Marketing
the
purchaser often
approaches the supplier
 Persuades supplier to
accept order, not other
way around
 Only alternative other
than making part in-
house
Purchaser
Initiative
•
Purchaser may quote
prices, terms, and
conditions
 High payoffs for
suppliers, hence supplier
development
 Can apply to suppliers
of all sizes
Reasons for
Reverse Marketing
Deficiencies in normal
industrial marketing Neither
party is often fully aware
of all opportunities because of
lack of aggressiveness by
salesperson or lack of
inquisitiveness by purchaser
Certain product lines receive
more attention and lag time may
between
exist time product is introduced
and time purchaser is informed
Purchaser aggressiveness ensures
future supply
Three Outside
Sources Driving
Reverse Marketing
Technological - New
products, materials and
processes
 Increase in
International Trade
Development of foreign
sources of supply
 Competitive Advantage in
Supply Chain
Supply Chain
Management
Managing the entire flow
of information,
materials and services
 from raw materials to
final consumer
 SCM different
supply from management
focuses which onlyon
relationships
Characteristics of
SCM
Info sharing and
monitoring
Inventory
Management
Evaluations of
 Joint planning over
long- term
 Coordination over all
levels of business and
management
 Leadership and Sharing

in risk and return

necessary
Goals of SCM
 Reduce uncertainty and
risk
 Improve inventory
levels,
cycle time, processes and
service levels
 Primary focus of SCM:
Optimization
SCM Implementation
 Extremely difficult and
complex
 Supply Network
Diminishing leverage
of purchaser
Secret
X
Case 8-2: Paron
Metal Fabricating
Inc.
Case 8-2: Paron
Metal Fabricating
Inc.
 Summary

 Donald Mines- Materials

Manager
 Considering Proposal
outsource manufacturing to
outrigger brackets of
Company-3 divisions-
operate separately
Trailer
Sandblast/ Paint
Metal fabricating
 Manufacture 40 trailers/

yr
2/3 November-
April secures
Outrigger
 containers
Comprised of 4 parts
 Solicited quotes from 3
local companies
 Lowest bid $108.20- Mayes

Steel
Outsourcing
Decision
 Solicited quotes from 3
local companies
Lowest bid $108.20- Mayes
Steel
Problem Statement
•
Should Donald Mines
chose to outsource all,
some or none of the
production of outrigger
brackets?
Alternatives
1 . Make outrigger brackets
in-house
2.Buy outrigger brackets
from Mayes
3.Make parts T-75 and T-
77
in-house and buy T-67, T-
69, T-70 from Mayes
 Make Buy Hybrid

Lead weeks weeks weeks

time
Order $75 $45
Cost
Holding
cost
Fixed
Cost
Total $150.10 $108.20 $102.39
Cost
Alternative
Comparison
Showcase
Showdown
 Make Buy Hybrid

Lead weeks weeks weeks

time
Order $75 $45
Cost
Holding
cost
Fixed
Cost
Unit $150.10 $108.20 $102.39
Cost
Alternative
Comparison
To Buy Costs
 November to April
Demand = 800*213 = 534
EOQ = 61
P = = 85
TC = $59,095.38
To Buy Costs
 May to October

Demand = 266
EOQ =
43 p = 43
TC = $29,710.42

Yearly cost =
$88,805.80
Benefits and
Risks of Buying
Benefits for Gain access
buying to worldclass
Reduce and capabilities
control Allow firm to
operational focus on core
costs competencies
Improve Risks of
company focus buying
Loss of
 Higher exit Unexpected

barriers fees or
Exposure to extra use
supplier charges
risks
To Make Costs
Annually:
 TC = FC +
$172,915.20
Benefits and
Risks of
Making
Benefits for Risks of making
making
Minimize May lose
idle option to
equipment outsource in
the future
Avoid sole May divert
source attention
dependency from core
 Maintain competencies
control
Increased
over operational
quality costs
Maintain
control
 • Lose access
over supply to worldclass
capabilities
 Costs
Hybrid
Assumption
1 . Order costs = $15
per piece
Hybrid Costs
2. Lead time stays the
same
3. Fixed Costs = 20%
To buy T-67, T-69 and
T-70 from
Hybrid Costs
November to April
Demand = 534
EOQ = 57
p = 85
Hybrid Costs
TC = $40,413.35
To buy T-67, T-69 and T-
70 from May to October
Hybrid Costs
Demand =
266 EOQ = 40 p
= 43
TC =
$20,306.25
Hybrid Costs
•To make T-75 and T-77
annually
Demand = 800
Hybrid Costs
TC = $31,684.80
Total costs forall parts
for the year
— $92,404.40
Solution
 Buy/Outsource
 Chart points to buying
as best option
 Decision is cost
effective
 Nota value-added
service
 Allows alternate uses
for facility
capacities
 Requires less overhead
Thank you
for
listening
Any questions
or comments?