Sourcing decisions in a supply chain

1. Sourcing Decisions in
a Supply Chain

2. The Role of Sourcing in
Supply Chain
• Sourcing is a set of entire business processes
required to purchase goods and services
• Outsourcing functions in the supply chain being
performed by third party.
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• Performing higher quality at lower lost
• Achieving better economic scale
• Reducing cost of purchasing
• Design collaboration
• Co ordination of supplier
• Achieving lower purchase price
Benefits Of Effective
Sourcing Decision

4. In-house or Outsource?
The decision to outsource is based
on the growth in supply chain
surplus provided by the third party
and the increase in risk incurred by
using a third party.
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5. How Do Third Parties Increase
the Supply Chain Surplus?
Capacity Aggregation
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Inventory aggregation
Transportation aggregation by
transportation intermediaries
Transportation aggregation
by storage intermediaries
Warehousing aggregation
Procurement aggregation
Receivables aggregation
Information aggregation
Relationship aggregation
Lower costs and higher quality

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Factors Influencing
Growth of Surplus
by a Third Party
Scale
Uncertainty
The
specificity
of assets

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The process is broken
Underestimation of the cost of coordination.
Reduced customer contact.
Ineffective contracts.
Loss of supply chain Visibility
Negative reputational impact 11
Loss of internal capability
Leakage of data

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• Macintosh computer were assembled at an apple factory
• EMS providers grew in the 1980s by OEM
• Machines were expensive but flexible
• Flextronics & Celestica took lead
• Celestica designed “Black box”

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• More than 95 percent procurement
• Lower prices with large spending on parts
• Warehousing and shopping in Europe and north America
• Lowered barriers to allow new entrants

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• UPS as logistic services
• In house laptop repair facility for manufacturer
• Repair facility in less than 24 hours
• Centralized 16 order processing and distribution
facilities

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• Aggregate demand suppliers “Li & Fung”
• Intermediary between suppliers and buyers
• Information hub in 32 countries
• Trade umbrellas as the European union and NAFTA

12. What is Total Cost Of
Ownership-TCO?
Total cost of ownership (TCO) is the
purchase price of an asset plus the
costs of operation.

13. Components of TCO:
• • Item value
• Minimum order quantities
• Material content
• Physical characteristics
• Method of delivery/lead time
• Source of supply
• Volatility of demand
• Product life cycle/obsolescence
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14. Another Components Are:
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• Order processing costs
• Application
• Program management costs
• Opportunity costs

15. Supplier Selection
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16. Single Sourcing Vs
Multiple Sourcing
Single Sourcing
• Higher indirect cost
• Involvement with a
single supplier
• Risky
• Eg- JIT
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Multiple Sourcing
• low indirect cost
• competitive bidding
• flexible
• Eg- for strategic items

17. Mechanism of
Supply Chain
1. Auction in supply chain
2. Negotiation
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18. Basic Principle of
Negotiation
• The first recommendation is to have a clear idea
of one's own value and as good an estimate of
the third party's value as possible.
• The second recommendation is to look for a fair
outcome based on equally dividing the bargaining
surplus or dividing it based on needs.
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19. Sharing Risk to Grow
Supply Chain Profits
• Independent action provide lower profit
• Coordinate actions provide maximize profit
• Strong firm push more risk to the supply
chain partners
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20. Three Approaches to Risk Sharing
Increase Overall Supply Chain Profit
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1 2 3

21. Risk Sharing Through Buyback
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• Return unsold inventory at an agreed upon
price
• Sharing risk with buyback unsold inventory

22. Risk Sharing Through
Revenue Sharing
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1. Charge a low wholesale price
2. Retailer’s cost is low when demand is low

23. Risk Sharing Through
Quantity Flexibility
1. Change the quantity order
2. Order according to better
market information
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24. The Impact of Incentives
in Outsourcing
Incentive in outsourcing is important
whenever the third parties action are not
fully observable
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• Encouraging greater effort
• Strong communicators of performance
• Poor incentive with back fire performance
Impact of Incentives

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Example of Incentive
• Chrysler offered an incentive to dealers the rough structure
was as follow.
• Keep margin if sales less than 75%
• Additional margin if exceeded 75% or below 100%
• More additional margin if exceed 100%but less 110%

27. Designing A Sourcing Portfolio:
Tailored Sourcing
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Firms have many options with regard to whom
to source from and where to source from .A
company must decide on whether to produce in
house or outsource to a third party. A company
can choose among
1. On shoring
2. Near-shoring
3. Offshoring

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On shoring OffshoringNearshoring

29. What is tailored
portfolio ?
A tailored portfolio consists of a combination
of responsive and low cost suppliers.

30. Categorization of
Purchased Goods
1. Based on materials
• Direct materials
• Indirect materials
2. Based on value or cost
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31. Use Multifunctional
Terms
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 They are relatively narrow and focused on
purchase price .
 A strategy developed with the
collaboration of :
Purchasing
Planning
Engineering
Manufacturing

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Coordination of purchasing across all regions allows a firm –
• To maximize economics of scale
• To reduce transaction cost .
Ensure Appropriate Coordination
Across Regions And Business Units

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1. Should not make price reduction .
2. All factors that influence the total cost of
ownership should be identified and
measured .
Evaluate The Total
Cost of Ownership

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It improves communication and
coordination between two parties .
Build Long Term Relationship
With Key Suppliers

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Thank you