Sourcing

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 Traditional view
• Less strategic in nature
• More concerned with getting materials and supplies
and do some negotiations
• More admin like preparing Purchase orders, invoices

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 Emerging View
• Sourcing has a strategic value
• Need to re-think concepts like core capability
• Global sourcing
• Uncertainties, risk
• Long term relationships, continuous improvements,
benchmarking, innovation, early involvement of
suppliers in design.
• Market structure, competition, litigations
• Ethics, sustainability

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 Reactive v/s Proactive Buying

Reactive Buying Proactive Buying

Purchasing is a cost centre Purchasing can add value
Purchasing receive specifications Purchasing (and suppliers) can
add to specifications
Price is the key variable Total value (or supply chain
surplus) is key
Systems isolated from suppliers Systems integrated with
suppliers
Stock to avoid risks Eliminate waste
Information is power Information (at times) may be
more valuable when shared

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 How does a third party increase supply chain
surplus? Discuss

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 Increasing surplus by third party
1. Reduction in agency costs
2. Capacity aggregation
3. Inventory aggregation
4. Transportation aggregation
5. Warehousing/Storage aggregation
6. Procurement aggregation
7. Information aggregation
8. Relationship aggregation
9. Higher quality, brand
10. Learning curve effect
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 Factors influencing growth of surplus

• Scale
– Large scale it is unlikely that a third party can achieve further
scale economies and increase the surplus
• Uncertainty
– If requirements are highly variable over time, third party can
increase the surplus through aggregation
• Specificity of assets
– If assets required are specific to a firm, a third party is
unlikely to increase the surplus
• Cost and quantity of available capital
– Third party may have available or lower cost capital

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 Risks of using a third party

1. The process is broken

2. Underestimation of the cost of coordination
3. Reduced customer/supplier contact
4. Loss of internal capability and growth in third-party
power
5. Leakage of sensitive data and information
6. Ineffective contracts
7. Negative reputational impact

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 Total Cost of ownership

• Mistake to focus only on quoted price

• Total cost of ownership (TCO)
– Includes all supply chain costs of sourcing from a particular
supplier
• Three “buckets”
– Acquisition costs
– Ownership costs
– Post-ownership costs

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 Total Cost of ownership

Performance Category Category Components Quantifiable?

Acquisition Costs Blank Blank
Supplier price Labor, material, and overhead Yes
Supplier terms Net payment terms, delivery frequency, minimum Yes
lot size, quantity discounts
Taxes and duties All tariffs and compliance costs Yes
Delivery costs All transportation costs from source to Yes
destination, packaging costs
Incoming quality costs Cost of inspection, defectives, and rework Yes
Management costs Cost of managing and planning the purchase Difficult

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 Total Cost of ownership

Performance Category Category Components Quantifiable?

Ownership Costs Blank Blank
Inventory costs Supplier inventory, including raw material, in Yes
process and finished goods, in-transit inventory,
finished goods inventory in supply chain
Warehousing cost Warehousing and material handling costs to Yes
support additional inventory
Manufacturing costs Cost of manufacturing associated with the Yes
sourced part
Production quality costs Impact of sourced part on finished product Difficult
quality
Cycle time costs Impact of sourced part on production cycle time Yes

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 Total Cost of ownership

Performance Category Category Components Quantifiable?

Post-Ownership Costs Blank Blank
Reputation Reputation impact of quality problems No
Warranty and product Warranty and product liability costs associated Difficult
liability costs with sourced part
Environmental costs Environmental costs affected by sourced part Difficult
Supplier capabilities Replenishment lead time, on-time performance, To some extent
flexibility, information coordination capability,
design coordination capability, supplier viability

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 Make – Buy continuum
Apart from extreme positions of complete outsourcing and vertical integration, there are
other alternatives
• Tapered integration-not completely outsourced. refers to a mix of vertical integration and market
exchange.Upstream, a producer might manufacture some of the input itself and buy the remaining portion from
independent firms. Downstream, the manufacturer might sell a portion of its output through an in-house sales
force and use independent sales forces to sell the remainder.Coca-Cola and Pepsi both having integrated bottling
subsidiaries while also relying on independent bottlers for production and distribution in some markets, or (3) BMW which
uses both in-house market research from its Corporate Center Development and external market research from
independent, specialized firms.
• Advantages
• Expansion of input channels without significant capital outlays
• Use of internal cost information to negotiate contracts with market firms
• Motivation tool for both internal division and market firms
• Protection against holdup risk[5]
• Disadvantages
• Both internal and external production may stay below minimum eff. scale
• coordination and monitoring problems
• Inefficient internal divisions may be kept when not efficient

• Collaborative Relationship –Keiretsu is a business network composed of

manufacturers, supply chain partners, distributors and financiers who remain
financially independent but work closely together to ensure each other's success.
In Japanese, the word keiretsu means “group.” The member's companies own
small portions of the shares in each other's companies, centered on a core bank;
this system helps insulate each company from stock market fluctuations
and takeover attempts, thus enabling long-term planning in projects. It is a key
element of the manufacturing industry in Japan.
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Strategic alliances, JVs Rakesh V | IIM Lucknow 13
 Purchasing Portflio – The Kraljic Matrix

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 You have a supplier for a critical component. The supplier
enjoys a monopolistic market. Discuss

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