Procurement and Outsourcing Strategies (DMS 280-290)

Outsourcing Benefits and Risks Potential Benefits y Economies of scale o Reduce manufacturing costs through aggregation of orders from many diff buyers y Risk pooling o Allows buyers to transfer dd uncertainty to the CEM(contract equipment manufacturers) As CEMs are able to aggregate demand, they are able to reduce uncertainty through the risk pooling effect. o CEMs could therefore reduce component inventory levels while maintaining or increasing service level y Reduce Capital Investment o Transfer capital investment to CEMs. CEMs can make this investment as it s implicitly shared between many of the CEMs customers y Focus on core competency o Buyer able to focus core strength  Specific talent, skill and knowledge sets that differentiates the company from competitors  Eg. Nike focusing on innovation, marketing rather than manufacturing y Increased flexibility o Ability to react to changes in customer Dd o Ability to use supplier s technical knowledge to accelerate product development cycle time o Ability to gain access to new technologies and innovation o These abilities are even more important in high tech ind where prods have short life cycle Potential Risks y Loss of competitive knowledge o Outsourcing critical components to suppliers may open up opportunities to competitors. o Outsourcing implies that companies lose their ability to intro new designs based on own agenda vs supplier s agenda o Outsourcing may prevent the development of new insights, innovations, and solutions that requires cross-functional teamwork  Due to many different suppliers y Conflicting objectives o Suppliers and buyers typically have different and conflicting objectives  Buyers vs Suppliers  Increased flexibility vs long term, stable commitment  Quick resolution to design problems vs slow responsiveness

Framework for buy/make decisions

Modular y Components are independent of each other y Components are interchangeable y Standard interfaces are used y Component can be designed or upgraded with little or no regard to other components y Customer preference determines the product configuration Integral y Are not made from off the shelf components y Designed as a system by taking top down design approach y Evaluated based on system perf, not based on component perf y Components in integral products perform multiple functions Hierarchical model y Customer importance o How important is the component to the customer? What is the impact of component on customer experience? Does the component affect customer choice? In short, what is the value customers attached to the component? y Component clockspeed o How fast does the component s technology change relative to other components in the system? y Competitive position o Does the firm have a competitive adv producing this component? y Capable suppliers o How many capable suppliers exist? y Architecture o How modular or integral is this element to the overall architecture of the system?

Procurement Strategies

Supplier Footprint Fisher s Framework

Functional products are associated with slow product clockspeed, predictable demand, and low profit margins. Eg diapers, soup, milk and tires. y PUSH supply chain strategy o Efficiency o Cost reduction o Supply chain planning

Innovative products such as fashion items, cosmetics, or high tech products are associated with fast product clockspeed, unpredictable demand, and high profit margins. y PULL supply chain strategy o Responsiveness o Maximizing service level o Order fulfillment What should the sourcing strategy be for components? We combine Kraljic s supply matrix and Fisher s framework. Fisher s framework emphasizes the demand while Kraljic s emphasizes the supply side. Four criteria to the framework required y Component forecast accuracy y Component supply risk y Component financial impact y Component clockspeed

Global Logistics And Risk Management (DMS 312-325) International Distribution systems y Manufacturing occurs domestically but distribution take place overseas International Suppliers y Raw materials and components are furnished by foreign suppliers, but final assembly is performed domestically Offshore Manufacturing y Product is typically sourced and manufactured in a single foreign location, and then shipped back to domestic warehouses for sale and distribution Fully integrated global supply chain y Products are supplied, manufactured and distributed from various facilities throughout the world Forces driving towards Globalization 1. Global Market forces a. Pressures created by foreign competitors b. Opportunities created by foreign customers i. Products are universally desired and many companies are willing to sell them globally, thus companies become global and their competitors must become global. 2. Technological Forces a. To gain access to markets or technology, companies in different regions frequently collaborate, resulting in the location of joint facilities close to one of their partners b. Global location of R&D facilities becoming more common i. As product cycles become shorter and time more important, companies discovers how useful it is to locate research facilities close to manufacturing facilities, helping transfer TECHNOLOGY from the former to the latter and speeds up the resolution of problems that may arise during the transfer ii. Specific technical expertise may be available in certain areas or region 1. Eg Microsot opening a research lab in Cambridge, UK to take advantage of expertise available in Europe 3. Global Cost Forces a. Low cost of unskilled labor used to be a decisive factor in determining factoring location b. Now, cheaper skilled labor is drawing companies abroad i. Eg. US consulting firms using Indian programmers to resolve Y2K issues 4. Political and Economic Forces a. Regional trade agreements encourage expansion beyond borders. b. Production processes may be redesigned to avoid tariffs c. Tariffs and quotas affect imports, and therefore, companies might choose to produce in host country

Risk Management

y Managing the unknown-unknown Redundancy y Careful analysis of supply chain cost trade-offs so that the appropriate level of redundancy is built into supply chain y Built at the design stage y Prepare the supply chain for supply disruption without significantly increasing supply chain costs Sensing and Responding y Speed in sensing and responding can help firm overcome unexpected supply problems y Requires accurate information in a timely fashion y Quick alternate sourcing for components when supply is potentially disrupted Adaptive Supply chain y Creates a community of supply chain partners that morph and reorganize to better react to sudden crisis-most difficult to implement y All elements share similar culture, work towards same objectives and benefit from financial gains y Affected supplier spreads its production shortfall to other suppliers through transfer in technology and design so as to prevent stoppages in the parent s company s production processes

Managing Global Risks Speculative Strategies y A company bets on a single scenario, with spectacular results or absolute dismal ones. o Jap Automakers bet that manufacturing solely in Japan, the rising labor costs can be offset by exchange rate benefits, rising productivity and increased levels of investment and productivity.  It didn t work and factories had to be built overseas. It wasn t a bad bet, as offshoring is time consuming and expensive Hedge Strategies y A company designs the supply chain such that any losses in part of the supply chain will be offset by gains in another. o Volkswagen operates plants In US, Mex and Germany. Depending on macroeconomic conditions, certain plants may be more profitable at various times over the others. o By design, strategy are simultaneously successful in some locations and unsuccessful in others Flexible Strategies y Enable a company to take advantage of different scenarios o Designed with multiple suppliers and excess manufacturing capacity in different countries. o Factories are designed to be flexible so that product can be moved at minimal costs from region to region as economic conditions demand Considerations for flexible strategy (contd) y Is there enough variability in the system to justify the use of flexible strategies? y Do the benefits of spreading production over various facilities justify the costs, which may include loss of economies of scale in terms of manufacturing and supply? y Does the company have the appropriate coordination and management mechanisms in place to take rapid advantage of flexible strategies? Approaches to utilize and implement flexible strategies effectively(contd) y Production shifting o Flexible factories and excess capacity and suppliers can used to shift production from region to region to take advantage of current circumstances. y Information sharing o Increased presence in many regions and markets will increase the availability of info, which can be used to anticipate market changes and source new opportunities y Global coordination o Multiple facilities worldwide provides a firm with a certain amount of market leverage. If a foreign competitor attacks one of your main markets, you can attack back. y Political leverage

o Opportunity to move operations rapidly gives firms a measure of political leverage in overseas operations. Implicit threat of movement is sufficient to prevent local politicians from taking unfavourable actions. Requirements for Global Strategy Implementation Developments that are necessary to set the stage for massive global integration 1. Product development a. Design products that can be modified easily for major markets, and which can be manufactured in various facilities i. An international design team may minimize the impact of an average design 2. Purchasing a. Management teams responsible for purchase of important materials from many vendors worldwide i. Easier to ensure quality and delivery options from various suppliers are compatible and qualified team present to compare pricing of various suppliers ii. Guarantee sufficient suppliers in different regions are at hand to ensure the flexibility necessary to take full advantage of global supply chain 3. Production a. Excess capacity and plants in several regions are essential I firms are to take full advantage by shifting production as conditions warrant i. Effective communications systems required so as it can be managed effectively. ii. Centralized management is thus essential. 4. Demand Management a. Has to have at least some centralized component i. Analysts in each region to ensure market based info is passed on. Communications is key. b. Involves setting marketing and sales plans based on projected demand and available product. 5. Order fulfillment a. A centralized system must be in place so that regional customers can receive deliveries from the GSC with the same efficiency as they do from local or regionally based supply chains