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Objectives
Be able to:
Identify and describe the various steps of the strategic sourcing
process.
Perform and interpret the results of a simple spend analysis.
Use portfolio analysis to identify the appropriate sourcing strategy
for a particular good or service.
Describe the rationale for outsourcing and discuss when it is
appropriate.
Perform a simple total cost analysis.
Show how multicriteria decision models can be used to evaluate
suppliers and interpret the results.
Understand when negotiations should be used and the purpose of
contracts.
Describe the major steps of the procure-to-pay cycle.
Discuss some of the longer-term trends in supply management
and why they are important.
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Q: What is Sourcing Management?
The broad set of activities carried out by
organizations to analyze sourcing opportunities,
develop sourcing strategies, select suppliers,
and carry out all the activities required to
procure goods and services.
Procurement

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1. Material Raw materials
Main component
Sub component
2. Machine
3. Finished Outsourcing
goods
4. Service Logistics service
Organisation service

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is basic material used in the production of goods,
energy, or intermediate materials that are
themselves RM for finished products.
e.g., raw latex, coal, raw biomass, iron ore, logs,
crude oil, air or seawater.

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Main component
Product produced from RMs but it is not
a finished goods yet. It is going to be the core
part of the finished goods in the final assembly
process.

Sub component
Product produced from RMs but it is not
a finished goods yet. It is going to be the
supporting part of the finished goods in the
final assembly process.
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1. Global Sourcing
Competition against global competitors
and their supply chains.
Advances in information systems have
helped.

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2. Financial Impact

Table 7.1

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3. Performance Impact
Purchased goods can have a major effect
on other dimensions such as quality and
delivery performance.

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Performance Impact Example 7.2

- Sourcing dialysis machine valves


- Estimated cost of a failed valve = $1,000

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Performance Impact Example 7.2

- Sourcing 50 dialysis machine valves (Total Costs)

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1. Analysing sourcing
needs

2. Screening supplier

3. Supplier selection

4. Negotiate or Competitive
bidding and agreement

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Q: Whether to do it internally (Insource) or to
source it from outside supply chain
partner(Outsource)?

Make-or-Buy decision

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The Make-or-Buy Decision (Core competency)
A high-level, often strategic, decision regarding which
products or services will be provided internally and
which will be provided by external supply chain partners.

Insourcing The use of resources within the firm get


the business outcomes. (Core competency)

Outsourcing The use of supply chain partners to


get the business outcomes.

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The Make-or-Buy Decision (Core competency)

Table 7.6
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The Make-or-Buy Decision (Core competency)

Factors that affect the decision


to Insource or Outsource.

Table 7.7

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Make or buy decision (Total cost analysis)

Manager must understand the cost issues


associated with the make-or-buy decision.

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Make or buy decision (Total cost analysis)

Total cost analysis: A process by which a firm


seeks to identify and quantify all of the major
costs associated with various sourcing options.

1. Direct costs Costs tied directly to the level


of operations or supply chain activities.
2. Indirect costs Costs that are not tied
directly to the level of operations or supply
chain activity.

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Make or buy decision (Total cost analysis)

Insourcing and Outsourcing Costs

Table 7.8
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Make or buy decision (Total cost analysis)
Example: A product requires 1.3 square feet of sheet metal,
and the cost of sheet metal is $0.90 per square feet,
the direct cost of the sheet metal is:
$0.90 x 1.3 feet = $1.17

Example: Company needs to spend $600,000 to design


the new product. If they plan to produce 200,000 units,
they might assign the design cost as follow:
$600,000 200,000 units = $3.00 per unit

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Single Multiple
sourcing sourcing

Cross Dual
sourcing sourcing

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Single sourcing The buying firm depends on a
single company for all or nearly all of an item or
service.
Multiple sourcing The buying firm shares its
business across multiple suppliers.
Cross sourcing Using a single supplier for a
certain part or service and another supplier with the
same capabilities for a similar part.
Dual sourcing Using two suppliers for the same
purchased product or service.

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Criteria to evaluate suppliers

1. Process and design capabilities

2. Management capability

3. Financial condition and cost structure

4. Longer-term relationship potential


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Request for information (RFI)
-An inquiry to a potential
supplier about that suppliers
products or services for
potential use in the business.
The inquiry can provide
certain business requirements
or be of a more
exploratory nature.

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Weighted-point evaluation system An evaluation
system to evaluate potential suppliers, track suppliers
performance over time, and rank current suppliers.
n
Score X Performance XY WY
Method Y 1
1. Assign weights to performance dimensions. (Sum=1)
2. Rate the performance of each supplier with regard to
each dimension.
3. Calculate the total score.

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Supplier Selection Example 7.6

Summary Data for Three Possible Suppliers

Table 7.11

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Criteria Weights Scoring Scheme
WPrice = 0.3 5 = excellent
4 = good
WQuality = 0.4 3 = average
2 = fair
WDelivery = 0.3 1 = poor

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Performance Values for Alternative Suppliers

Table 7.13

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n
Score X Performance XY WY
Y 1

Total Scores for Alternative Suppliers


Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6

Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5

Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2

Aardvark should improve their quality.


Beverly Hills should improve their delivery and price.
Conan is out of the running as a potential supplier.

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Negotiation

VS Contracting

Competitive
bidding

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1. Negotiating A more costly, interactive approach to
final supplier selection.
Negotiation is used best when:
The item is a new or technically complex item with
only vague specifications.
The purchase requires agreement about a wide range
of performance factors.
The buyer requires the supplier to participate in the
development efforts.
The supplier cannot determine risks and costs
without additional input from the buyer.
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2. Competitive bidding A request for bids from
suppliers with whom a buyer is willing to do business.

Request for quotation A formal request for the


suppliers to prepare bids, based on the terms and
conditions set by the buyer.
Description by market grade/industry standard
Description by brand
Description by specification
Description by performance characteristics

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Request for quotation

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2. Competitive bidding:
Used when
-The buying firm can provide qualified suppliers with
clear descriptions of items or services to be purchased
-Volume is high enough to justify the cost and effort
-The buying firm does not have a preferred supplier

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Contracting The process of creating a detailed
purchasing contract to formalize the buyer-
supplier relationship.
Fixed-price contract Stated price does not
change.
Cost-based contract Price of the good or
service is tied to the cost of some other key
input or economic factor.

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Purchasing Cycle
1. Ordering
(P/O)

2. Follow up
& Expediting

3. Receipt &
Inspection

5. Records 4. Settlement
Maintenance & Payment
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The Procure-to-Pay Cycle
Ordering
Purchase order A document that authorizes a
supplier to deliver a product or service and includes
the terms and conditions of the sale.
Follow-up and expediting
Receipt and inspection
Statement of work (scope of work) Terms and
conditions for a purchased service.
Settlement and payment
May be paid through Electric Funds Transfer (EFT)
Records maintenance
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Sustainable Supply
Becoming more conscious of the importance of
being environmentally friendly and using
environmental performance in selecting
suppliers.
Ensuring compliance with regulations.
Reducing packaging, promoting recycling,
reducing costs.

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Supply Chain Disruptions
Caused by natural disasters,
economic/political events.
Cause a big threat to revenue streams.
Increased risk due to outsourcing to
global suppliers.

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Supply
Management
Case Study
Pagoda.com

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