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= Deciding on appropriate supply relationships for each activity. Three step approach: 1. Identify the activity and its requirements; 2. Make-or-buy decision: which activities are internal or not? 3. SRM: define, contract and manage the supplier relationship
Distinguish: Strategic buyers: lead cross-functional sourcing teams that develop sourcing strategy Tactical buyers: execute transactional purchase order processes
Purchasing, sourcing, procurement is the biggest single cost for most firms
Accounts for 60% of the average companys total cost
2.
Is a stable supply base with necessary capabilities available? Is outsourcing politically viable?
Yes
No
Yes
2. Is outsourcing necessary?
Are internal financial and operational capabilities insufficient?
No No
No
Can we contract on detailed requirements? Can we coordinate incentives and operational flows?
Easy Difficult Impossible
Market Buy
Vertical Integration
Dependency on knowledge
Firm does not have the people, skills, and knowledge required to produce the component Outsources in order to have access to these capabilities.
Transmissions
Company has the knowledge Designs all the components Depends on its suppliers capacities 70 % of the components outsourced
Toyota seems to vary its outsourcing practice depending on the strategic role of the components and subsystems
The more strategically important the component, the smaller the dependency on knowledge or capacity.
Choosing the Right Number of Suppliers: Value to Reducing the Supply Base
Lower cost and effort to manage relationships overall Greater potential to coordinate designs Increased capability to synchronize schedules Increased capability to evaluate suppliers on multiple criteria, not just cost Capabilities of procuring modules rater than parts Ease of tracking performance Ease of exchanging information
Increased cost of quality Greater demand volatility Diminished new product or service performance:
Increased cycles times Less effective optimization of integral designs
Choosing the Right Number of Suppliers: Per Item Outsourced Depends On Uniqueness of sourced item or equipment Viability and reliability of suppliers Stability of the technology associated with the item being sourced Significance of the buying companys business to the total business of the supplier Branding implications of sourcing decision Competitiveness of market
Slow Predictable
Fast Unpredictable
Profit Margin Product Variety Average forecast error at the time production is committed
Low
High
Sourcing from low-cost countries, e.g., mainland China and Taiwan is appropriate Innovative Products Focus should be on reducing lead times and on supply flexibility. Sourcing close to the market area Short lead time may be achieved using air shipments