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108sourcing processandmakeorbuy

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108sourcing processandmakeorbuy

  1. 1. Sourcing process
  2. 2. Sourcing <ul><li>The process of identifying, selecting and developing suppliers </li></ul><ul><li>Tactical and operational sourcing </li></ul><ul><ul><li>Low level decision, short term: non-critical, high-profit, low risk </li></ul></ul><ul><ul><li>E.g. “To buy” decision may be reversed due to supplier failure or work shortage </li></ul></ul><ul><li>Strategic sourcing </li></ul><ul><ul><li>Top-level decision, long term: high supply risk </li></ul></ul><ul><ul><li>E.g. Partnership </li></ul></ul>
  3. 3. The Sourcing Progress Sourcing and the Management of Suppliers 1 2 3 4 Identify needs Define requirements Decide to make or buy Identify possible suppliers Pre-screen possible sources Evaluate remaining supply base Choose supplier Deliver product/perform service 5 6 7 8 9 10 11 Identify type of purchase Conduct market analysis Post purchase performance evaluation Sourcing is the progress of identifying, selecting and developing suppliers The Eleven Stages of the Sourcing Process (Pg 368)
  4. 4. Identify type of purchase <ul><li>Three types </li></ul><ul><ul><li>Straight rebuy or routine purchase </li></ul></ul><ul><ul><li>Modified rebuy </li></ul></ul><ul><ul><li>New buy </li></ul></ul>
  5. 5. Discuss <ul><li>Examine strategies used by Paul to develop and maintain effective supplier relationship in the sourcing process </li></ul><ul><ul><li>Define sourcing process </li></ul></ul><ul><ul><li>List down the 11 stages of sourcing process and against each stage, analyse how Paul is to develop and maintain effective supplier relationship </li></ul></ul>
  6. 6. Make or buy <ul><li>Decision making process </li></ul><ul><ul><li>Is the component core business? </li></ul></ul><ul><ul><li>Have we design capacity? </li></ul></ul><ul><ul><li>Have we manufacturing capability? </li></ul></ul><ul><ul><li>Are we competitive? </li></ul></ul><ul><ul><li>Figure 11.4, page 393 </li></ul></ul>Make or buy
  7. 7. Yes No Yes No Yes No Yes No Make or buy Is the component/ assembly strategic important/core business? Have we design capability? Have we manufacturing capability? Are we competitive? Make Vs Buy Make Buy Make Vs Buy Buy Make Vs Buy Buy Make
  8. 8. Cost factors - Make or buy <ul><li>Marginal costing </li></ul><ul><ul><li>Example on page 394 – 395 </li></ul></ul>
  9. 9. Example 11.2, page 395 Marginal costing Materials 90 Labour 40 Variable overheads 10 Fixed overheads 20 Works cost 160 Given: Annual usage : 10,000 Purchase price : $156 , but the capacity would be idle 30% of fixed costs is recoverable if component is bought   Make Buy Difference Variable costs (90+40+10) 140 156 16 Variable costs x Volume 1,400,000 1,560,000   Fixed costs (30% x 20 x 10k) 60,000 60,000     1,460,000 1,620,000 160,000
  10. 10. Total cost of purchase = total cost of making Purchase price x OQ = Total fixed cost + Variable costs x OQ OQ (Purchase price - Variable costs) = Total fixed cost OQ = Total fixed cost / (Purchase price - Variable cost) OQ = F / (P - V)
  11. 11. <ul><ul><li>Example 11.4 (Pg 397) </li></ul></ul>Breakeven analysis Variable Fixed Materials 90 90   Labour 40 40   Variable overheads 10 10   Fixed overheads 20   20 160 140 20 Give : Annual usage 10,000 items Purchase price: $156 30% recoverable of fixed cost if purchase outside Break even point: F/(P-V) = (30%x$20x10,000)/$156-$140) = 3,750 units F: fixed cost, P=Purchase price, V=Variable cost per unit If >3750 items -> making If <3750 items -> buying
  12. 12. Other factors – make or buy <ul><li>Quantity factors </li></ul><ul><ul><li>In favour of making - E.g. Use up idle capacity </li></ul></ul><ul><ul><li>In favour of buying – E.g. Too small quantity </li></ul></ul><ul><li>Qualitative factors </li></ul><ul><ul><li>In favour of making </li></ul></ul><ul><ul><ul><li>E.g. Maintain secrecy </li></ul></ul></ul><ul><ul><li>In favour of buying </li></ul></ul><ul><ul><ul><li>E.g. Spread financial risks (Page 397 – 398) </li></ul></ul></ul>
  13. 13. Discuss <ul><li>Recommend make-or-buy decisions to Paul for ‘DimS’ </li></ul>
  14. 14. NPV
  15. 15. Make per unit US$ Direct labour 40 Inventory storage 25 Factory overheads 15 Capital equipment 30 Cost per unit 110 Make Buy Difference Cost per unit $110 $80 $30 Cost × volume (100,000 pieces) $11,000,000 $8,000,000 $3,000,000

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