Supply Chain Management, Sourcing Pricing and Procurement Process


Published on

Supply Chain Management, Sourcing Pricing and Procurement Process ,
Presentations By Rajendran Ananda Krishnan,

Published in: Business, Technology
No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • Sourcing
  • Supply Chain Management, Sourcing Pricing and Procurement Process

    1. 1. Supply Chain Management:Sourcing, Pricing andProcurement Process Rajendran Ananda Krishnan
    2. 2. Topics to be coveredSourcing and Pricing Sourcing – In house or Outsource 3rd and 4th PLs Supplier Scoring and Assessment Selection, Design Collaboration Procurement Process, Sourcing Planning and Analysis Pricing and Revenue Management for multiple customers, Perishable products, seasonal demand, bulk and spot contracts prettythings
    3. 3. Sourcing – In-house orOutsource The decision of a firm to perform its activities internally or get those activities done from an independent firm is known as the make versus buy decision. Bharti Airtel, India’s number one private telecom service provider announced its decision to outsource key network management activities, IT services and call centre operations also prettythings
    4. 4. Bharti Airtel : Outsourcing of NetworkOperations  Network Management to Ericsson, Nokia and Siemens – Manage the existing network and deploy and operate new base stations in the future.  IT Management to IBM –IBM manages all IT services (billing, CRM), operates data centres, help desk for IT support and application development.  Customer Service call centres to Hinduja, TMT, Mphasis & IBM Daksh – Managing customer service call centres for all customers except corporate clients and high-value clients. Bharti itself is maintaining customer service for these high-end customers. prettythings
    5. 5. Out sourcing Vs Off shoring Out sourcing - Owning the facilities and giving them to third party and getting manufactured . -Off shoring Not owning any facilities, but making others to acquire facility and getting manufactured: prettythings
    6. 6. Benefits from effective sourcingdecisions  Better economies of scale can be achieved if orders within a firm are aggregated. More efficient procurement transactions can significantly reduce the overall cost of purchasing. Design collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs. Good procurement processes can facilitate coordination with the supplier and improve forecasting and planning. Better coordination lowers inventories and improves the matching of supply and demand. Appropriate supplier contracts can allow for the sharing of risk, resulting in higher profits for both the supplier and the buyer. Firms can achieve a lower purchase price by increasing competition through the use of auctions. prettythings
    7. 7. In-house or OutsourceThe 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. A firm should consider outsourcing if the growth in surplus is large with a small increase in risk.How do Third parties increase the Supply Chain SurplusThird parties increase the supply chain surplus if they either increase value for the customer or decrease the supply chain cost relative to a firm performing the task in-house.Third parties can increase the supply chain surplus effectively if they are able to aggregate supply chain assets or flows to a higher level prettythings
    8. 8.  Capacity aggregation – A third party can increase the supply chain surplus by aggregating demand across multiple firms and gaining production economies of scale that no single firm can on its own. One of the reasons that Dell outsources design and production of the processors in its PCs to Intel is that Intel supplies many computer manufacturers and gains economies of scale that are not available to Dell if it designs and produces its own processors. Inventory Aggregation – A third party can increase the supply chain surplus by aggregating inventories across a large number of customers. Aggregation allows them to significantly lower overall uncertainty and improve economies of scale in purchasing and transportation. They carry significantly less safety and cycle inventory than would be required if each customer decided to carry inventory on its own. prettythings
    9. 9.  Transportation Aggregation – UPS, FedEx and a host of LTL carriers are examples of transportation intermediaries that increase the supply chain surplus by aggregating transportation across a variety of shippers. Each shipper wants to send less than the capacity of the transportation mode. The transportation intermediary aggregates shipments across multiple shippers, thus lowering the cost of each shipment below what could be achieved by the shipper alone. Warehousing Aggregation – The growth in surplus is achieved in terms of lower real estate costs as well as lower processing costs within the warehouse. Savings through warehousing aggregation arise if a supplier’s warehousing needs are small or if its needs fluctuate over time. prettythings
    10. 10.  Procurement Aggregation – A third party increases the supply chain surplus if it aggregates procurement for many small buyers and facilitates economies of scale in production and inbound transportation. Lower costs and higher quality – If these benefits come from specialization and learning, they are likely to be sustainable over the long term. A specialized third party that is further along the learning curve for some supply chain activity is likely to maintain its advantage over the long term. prettythings
    11. 11. Risks of using a Third Party The process is broken – The biggest problems arise when a firm outsources supply chain functions simply because it has lost control of the process as it will make it worse and harder to control. Underestimation of the cost of coordination – Underestimate the effort required to coordinate activities across multiple entities performing supply chain tasks. This is especially true if a firm plans to outsource specific supply chain functions to different third parties. prettythings
    12. 12.  Reduced Customer/supplier contact – A firm may lose customer/supplier contact by introducing an intermediary. The loss of customer contact is particularly significant for firms that sell directly to consumers but decide to use a third party to either collect incoming orders or deliver outgoing product. Loss of internal capability and growth in third party power – A firm may choose to keep a supply chain function in-house if outsourcing will significantly increase the third party’s power. Companies such as HP and Motorola have moved most of their manufacturing to contract manufacturers but are reluctant to move either procurement or design even though contract manufacturers have developed both capabilities. prettythings
    13. 13.  Leakage of sensitive data and information – Using a third party requires a firm to share demand information and in some cases intellectual property. If the third party also serves competitors, there is always the danger of leakage. prettythings
    14. 14. Third and Fourth Party LogisticsProviders A third party logistics provider performs one or more of the logistics activities relating to the flow of product, information and funds that could be performed by the firm itself. Traditionally, 3 PLs focused on specific functions such as transportation, warehousing and information technology within the supply chain. Most 3PLs started out by focusing on one of the functions in the supply chain. For eg. UPS started out as a small package carrier. prettythings
    15. 15.  A third-party logistics provider (abbreviated 3PL, or sometimes TPL) is a firm that provides a one stop shop service to its customers of outsourced (or "third party") logistics services for part, or all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials. prettythings
    16. 16. Types of 3PL Freight forwarders Courier companies Other companies integrating & offering subcontracted logistics and transportation servicesHertz and Alfredsson describe two categories of 3PL providers: Standard 3PL provider: This is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. Service developer: This type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing, cross- docking, specific packaging, or providing a unique security system. prettythings
    17. 17.  A third-party logistics provider (3PL) is an asset based company that offers logistics and supply chain management services to its customers. It commonly owns and manages distribution centers and transport modes. A fourth-party logistics provider (4PL) integrates the resources of producers, retailers and third-party logistics providers in view to build a system-wide improvement in supply chain management. They are non- asset based meaning that they mainly provide organizational expertise. prettythings
    18. 18. 4th Party Logistics Services (4PL) With the Increased globalization of SC , customers are looking for players who can manage virtually all aspects of their supply chain. This has led to the concept of fourth party logistics provider. Anderson Consulting ( Accenture) defined 4th PL as An integrator that assembles resources, capabilities and technology of its own and other Organizations, to design, build and run comprehensive SC solutions. 3PL – targets a function, 4PL – entire prettythings
    19. 19. A Fourth-party logistics provider (abbreviated 4PL), lead logistics provider, or 4th Party Logistics provider, is a consulting firm specialized in logistics, transportation, and supply chain management. Typical fourth- party logistics providers are CPCS, SCMO, BMT, Deloitte, Capgemini, 3t Europe, Accenture and Geodis. prettythings
    20. 20. 4TH PL company examples Menlo logistics manages all aspects of the supply chain for Home Life , national home furnishing retail chain ◦ Integrates transportation, warehousing, home delivery, product set-up, repair, and reverse logistics. Kuehne & Nagel AG - Swiss Freight forwarder, served as 4th PL for Nortel Network for outbound logistics to customers. Handles 35 to 40 forwarders, warehouse managers, truckers, and other log functions. Li & Fung- served Reebok, managing sourcing and production across1000s of factories in 32 countries. prettythings
    21. 21. The main factors behind the increasing role of 3PL and 4PL are: The international division of production associated with globalization helped set a global network of manufacturing activities, implying that producers and consumers tend to have an acute geographical separation requiring complex transportation services. An increasing focus of manufacturers and retailers on their core business (known as core competencies) and sub-contracting activities such as logistics where they have less expertise. Productivity gains in supply chain management in terms of costs and reliability that can be derived from the managerial and information technology expertise provided by 3/4PL. Better utilization of transportation assets and resulting economies of scale. 3PLs can make better use of transportation assets by balancing the needs of multiple client shippers across transportation and distribution. 3/4PLs are more prone to implement novel supply chain management practices requiring a higher expertise on material flows such as transloading , crossdocking and shipment tracking. prettythings
    22. 22. Key Sourcing- Related Processes 2. Supplier1. Suppliers 5. Sourcing selection and 3. Design 4.Scoring and Planning and contract Collaboration Procurementassessment Analysis negotiation prettythings
    23. 23. Supplier Scoring and AssessmentIn addition to quoted price, the following factors must be considered when scoring and assessing suppliers : 1. Replenishment Lead time 2. On- time performance 3. Supply Flexibility 4. Delivery Frequency / Minimum lot size 5. Supply Quality 6. Inbound Transportation Cost 7. Pricing Terms 8. Information coordination capability 9. Design Collaboration capability 10. Exchange rate , Tax and Duties 11. Supplier Viability prettythings
    24. 24. When scoring and assessing suppliers , the following factors other than quoted price must be considered: Replenishment Lead Time – As the replenishment lead time from a supplier grows, the amount of safety inventory that needs to be held by the buyer also grows. On-time performance – It affects the variability of the lead time. A reliable supplier has low variability of lead time, whereas an unreliable supplier has high variability. As the variability of lead time grows, the required safety inventory at the firm grows very rapidly. Supply Flexibility – Supply flexibility is the amount of variation in order quantity that a supplier can tolerate without letting other performance factors deteriorate. The less flexible a supplier is, the more lead time variability it will display as order quantities prettythings
    25. 25.  Delivery frequency/minimum lot size – Affect the size of each replenishment lot ordered by a firm. As the replenishment lot size grows, the cycle inventory at the firm grows, thus increasing the cost of holding inventory. Supply quality – A worsening of supply quality increases the variability of the supply of components available to a firm. Quality affects the lead time taken by the supplier to complete the replenishment order. Inbound transportation cost – Sourcing a product overseas may have lower product cost but generally incurs a higher inbound transportation cost, which must be accounted for when comparing suppliers. prettythings
    26. 26.  Pricing terms – Include the allowable time delay before payment has to be made and any quantity discounts offered by the supplier. Allowable time delays in payment to suppliers save the buyer working capital. Information Coordination Capability – Affects the ability of a firm to match supply and demand. Design Collaboration Capability – Good design collaboration for manufacturability and supply chain can also decrease required inventories and transportation cost. Exchange rates, taxes and duties- Significant for a firm with a global manufacturing and supply base. Supplier viability – Supplier should be around to fulfill the promises it makes. prettythings
    27. 27. Supplier Selection - Auctions andNegotiationsA firm must decide whether to use single sourcing or multiple suppliers. Single sourcing guarantees the supplier sufficient business and proper coordination is possible if there is a single source.Multiple sources ensures a degree of competition and also the possibility of a backup should a source fail to deliver. prettythings
    28. 28. Selection of suppliers is done using:1. Auctions in the supply chain Sealed-bid first price auction – requires each potential supplier to submit a sealed bid for the contract by a specified time. Contract is assigned to the lowest bidder. English Auctions – The auctioneer starts with a price and suppliers can make bids as long as each successive bid is lower than the previous bid. The supplier with the lowest bid receives the contract. Dutch Auctions – The auctioneer starts with a low price and then raises it slowly until one of the suppliers agrees to the contract at that price. Second Price Auctions – Each potential supplier submits a bid. The contract is assigned to the lowest bidder but at the price quoted by the second lowest bidder. prettythings
    29. 29. Basic Principles of NegotiationNegotiation is likely to result in a positive outcome only if the value the buyer places on outsourcing the supply chain function to this supplier is at least as large as the value the supplier places on performing the function for the buyer. The difference between the values of the buyer and seller is referred to as the bargaining surplus. The goal of each negotiating party is to capture as much of the bargaining surplus as possible. prettythings
    30. 30. Contracts and Supply ChainPerformance Buyback or Returns Contracts – Allows a retailer to return unsold inventory upto a specified amount, at an agreed – upon price. Revenue-Sharing Contracts – The manufacturer charges the retailer a low wholesale price and shares a fraction of the retailer’s revenue. Quantity Flexibility Contracts – The manufacturer allows the retailer to change the quantity ordered after observing demand. prettythings
    31. 31. Design Collaboration (withSuppliers) It is crucial for a manufacturer to collaborate with suppliers during the design stage if product costs are to be kept low. Working with suppliers can speed up product development time significantly. This is crucial in an era when product life cycles are shrinking. Finally, integrating the supplier into the design phase allows the manufacturer to focus on system integration, resulting in a higher quality product at lower cost. Helps to reduce cost, improves Quality and reduce time to market.Eg; Ford designed the car ‘THUNDER BIRD’ through suppliers involvement, they not only manufactured the components, but also responsible for the design. This allowed Ford to bring the New model to market with in 36 months of program approval.. prettythings
    32. 32. The Procurement Process There are two main categories of purchased goods : Direct and Indirect materials.  Direct materials are components used to make finished goods. For eg. Memory, hard drives and CD drives are direct materials for a PC manufacturer.  Indirect materials are goods used to support the operations of a firm. PCs, stationary items are examples of indirect materials for an automotive manufacturer. prettythings
    33. 33. Difference between Direct andIndirect Materials. Direct Materials Indirect MaterialsUSE Production Maintenance. Repair and support operationsAccounting Cost of Goods Sold Power , Fuel and other Packing materials usedImpact on production Any delay will delay in Less direct impact ProductionProcessing cost relative Low Highto value of transactionNumber of Transactions Low High prettythings
    34. 34. Product Categorization by Value and Criticality High Critical Items (Nuts & Strategic Items Bolts) (Electronics for Long LT, Ensuring Auto manufacturers ) Availability is important Buyer supplierCritical Items than Price relationship is long term. General Items Bulk purchase Items Indirect Materials Chemicals , Packaging Goal is To keep the materials. Use of well cost of acquisition or designed auctions for transaction cost low.) procurement. LOW LOW High Value / Cost prettythings
    35. 35. Sourcing Planning and Analysis One important analysis is the aggregation of spending across and within categories and suppliers. Aggregation provides visibility into what a company is purchasing and from whom the product is being purchased. Managers can use this information to determine economic order quantities, volume discounts and projected quantity discounts on future volumes. The second piece of analysis relates to supplier performance. Supplier performance should be measured against plan on all dimensions that affect total cost, such as responsiveness, lead times, on-time delivery, and quality. prettythings
    36. 36. Suppliers Portfolio Spending and supplier performance should be used to decide on the portfolio of suppliers to be used and the allocation of demand among the chosen suppliers. Portfolio of suppliers with complementary strengths, to be balanced Cheaper, but lower performing, suppliers to be used to supply base and regular demand. Higher performing but more expensive, suppliers should be used to buffer against variation in demand. prettythings
    37. 37. Pricing and Revenue Management(PRM)  Revenue Management is the use of pricing to increase the profit generated from a limited supply of supply chain assets. Revenue management may also be defined as the use of differential pricing based on customer segment, time of use, and product or capacity availability to increase supply chain surplus. prettythings
    38. 38. Contd.Revenue management adjusts the pricing and available supply of assets to maximize profits. Revenue management has a significant impact on supply chain profitability when one or more of the following four conditions exist :1. The value of the product varies in different market segments.2. The product is highly perishable or product wastage occurs.3. Demand has seasonal and other peaks.4. The product is sold both in bulk and on the spot market.Airline seats are a good example of a product whose value varies by market segment. A business traveler is willing to pay a higher fare for a flight that matches his or her schedule. In contrast, a leisure traveler will often alter his or her schedule to get a lower fare. An airline that can extract a higher price from the business traveler compared to the leisure traveler will always do better prettythings
    39. 39. Pricing and Revenue Managementfor Multiple Customer segments1. Example of multiple customer segment: - Business traveler, willing to pay high a higher fare to travel a specific schedule. - Leisure traveler, ready to shift their schedule to take advantage of lower fares. 2. Trucking firm has 6 Trucks : 6000 Cft x $ 2.50 = $15,000………… A1 (Ordinary) 3000 Cft x $ 3.50 = $ 10500 3000 Cft x $ 2.00 = $ 6000 ……A2 ( By PRM) Total = $ 16500 Additional Revenue......$ 1500 prettythings
    40. 40. Allocating Capacity to a Segmentunder Uncertainty In most instances of differential pricing, demand from the segment paying the lower price arises earlier in time than demand from the segment paying the higher price. A supplier may charge a lower price to a buyer willing to commit far in advance and a higher price to buyers wanting to place their orders at the last minute. The basic trade off to be considered by the supplier with production capacity is between committing to an order from a lower price buyer or waiting for a high price buyer to arrive later on. prettythings
    41. 41. Contd.  The two risks in such a situation are spoilage and spill.  Spoilage occurs when the capacity reserved for higher price buyers is wasted because demand from the higher price segment does not materialize.  Spill occurs if higher price buyers have to be turned away because the capacity has already been committed to lower price buyers.  Another approach to differential pricing is to create different versions of a product targeted at different segments. Publishers introduce new books from best-selling authors as hard-cover editions and charge a higher price. The same books are introduced later as paperback editions at a lower price. prettythings
    42. 42.  Different versions can also be created by bundling different options and services with the same basic product. Automobile manufacturers create a high-end, a mid- level and a low-end version of the most popular models based on the options provided. This policy allows them to charge differential prices to different segments for the same core product. Many contact lens manufacturers sell the same lens with a one-week, one-month and six-month warranty. prettythings
    43. 43. Tactics to be followed when servingMultiple Customer segments  1. Price based on the value assigned by each segment  2. Use different price for each segment  3. Forecast at the segment level prettythings
    44. 44. Pricing and Revenue ManagementFor Perishable Assets  Any Asset that loses Value over Time is called perishable. ◦ Fruits, Vegetables, Pharmaceuticals etc, ◦ Products such as computers and cell phones that lose value as new models are introduced. ◦ High fashion apparels ◦ All forms of production, transportation, storage capacity, seating capacity, travelling capacity etc, that is wasted if not fully utilized. ◦ Example of revenue management for a perishable asset is the use of overbooking by the airline industry. An airplane seat loses all value once the plane takes off. Given that people often do not show up for a plane even when they have a reservation, airlines sell more reservations than the capacity of the plane, to maximize expected revenue. prettythings
    45. 45. Two RM tactics used for perishableassets  1. Vary price dynamically over time to maximize expected revenue ( Dynamic Pricing)  2. Overbook sales of assets ,to account for cancellations (eg. In Airlines and Railways) Dynamic Pricing is the tactic of varying price over time, is suitable for assets such as fashion apparel that have a clear date beyond which they lose a lot of their value. Apparel designed for the winter does not have much value by April. prettythings
    46. 46. Pricing & Revenue Management ForSeasonal Demand Seasonal peak of demand – is a common occurrence. 1. For, Peak sales period is ‘December’. As a result of the seasonal peak, there is a significant increase in the requirement for picking and packing as well as transportation capacity. Bringing in short- term capacity is expensive and decreases Amazon’s margin. Off-peak discounting is followed for shifting demand to November. Free pickup and shipping is offered to customers in Nov, encouraging customers to shift demand from December to November. 2. Tactic is, to charge a higher price during the peak period and a lower price during off-peak period . Trade-off between ‘revenue increase due to low-price prettythings
    47. 47. Marriott Corporation ( Hotel) Hotel industry uses ‘differential pricing’ by ‘day of week’ and ‘time of year.’ Here goal is not to shift demand- but to increase demand during periods of low demand by attracting price-sensitive customers, such as vacationing families, with a price discount. For business customers, peak demand days occur in the middle of the week. Lower rates during weekends to encourage families to use the hotel. Charge customers a Lower rate if families stay over a longer period that also covers low demand days. This tactics increase the profit of the owner of assets, and brings in potentially new customers during the off-peak discount period. prettythings
    48. 48. Pricing & Revenue Management forBulk and Spot Contracts Most firms face a market in which some customers purchase in bulk at a discount and others buy single units or small lots at a higher place. Warehousing capacity may be leased in bulk to a large company or in small amounts to large companies for their emergency needs or to small companies. In most instances, owners of supply chain assets prefer to fulfill all demand that arises from bulk sales and try to serve small customers only if any assets are left over. For a firm that wants to be a niche player, targeting one of the two extremes is a sensible strategy. It allows the firm to focus its operations on serving either only the bulk segment or only the spot market. For other firms, however, a hybrid strategy of serving both segments is appropriate. prettythings
    49. 49. PRM - Guidelines1) Evaluate your market carefully – The first step in revenue management is to identify the customer segments being served and their needs.2) Quantify the benefits of Revenue Management – It is critical to quantify the expected benefits from revenue management before starting the project.3) Implement forecasting process – To use overbooking with any degree of success, an airline must be able to forecast cancellation patterns.4) Apply optimization to obtain the revenue management decision – The goal of optimization is to use forecasts of customer behavior to identify a revenue management tactic that will be most effective. prettythings
    50. 50. Contd.5) Involve both sales and operation – Salespeople must understand the revenue management tactic in place so they can align their sales pitch accordingly.6) Understand and Inform customer – Customers will have a negative perception of revenue management tactics if they are simply presented as a mechanism for extracting maximum revenue.7) Integrate supply planning with revenue management – The point is not to use revenue management in isolation, but rather to combine it with decisions on the supply side. prettythings
    51. 51.