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1. Kripa Shanker IIT Kanpur 1
SOURCING DECISIONS IN A SUPPLY CHAIN
SOURCING, TRANSPORTING, AND PRICING
PRODUCTS
TRNSPORTATION IN A SUPPLY CHAIN
PRICING AND REVENUE MANAGEMENT IN
A SUPPLY CHAIN

2. Kripa Shanker IIT Kanpur 2
SOURCING DECISIONS IN A SUPPLY CHAIN
SUPPLY CHAIN STAGES
Supplier Manufacturer Distributor Customer
Retailer
Supplier
Supplier
Manufacturer
Manufacturer
Distributor
Distributor
Retailer
Retailer
Customer
Customer

3. Kripa Shanker IIT Kanpur 3
SOURCING DECISIONS IN A SUPPLY CHAIN
Suppli
er
Raw materials
Components
Products
Services
Other resources
Suppli
er
Suppli
er
Suppli
er
Suppli
er
Sourcing :
Entire set of business processes
required to purchase goods and
services.
Supplier
Scoring
and
Assessment
Supplier
Selection
and
Contract
Negotiation
Design
Collaboration
Procurement
Sourcing
Planning
and
Analysis
Key Sourcing Processes

4. Kripa Shanker IIT Kanpur 4
SUPPLIER SCORING AND ASSESSMENT
Supplier Performance
Factors
(+ Purchase Price)
Purchase
price
Inventory Transportation
Cost
Product
Introduction
Time
Cycle Safety
Replenishment lead time X
On-time performance X
Supply flexibility X
Delivery frequency/
minimum lot size
X X X
Supply quality X X
Inbound transport cost X
Pricing (payment) terms/
quantity discounts
X X
Information coordination X X
Design collaboration X X X X X
Exchange rates & taxes X
Supplier viability X X

5. Kripa Shanker IIT Kanpur 5
SUPPLIER SELECTION AND CONTRACTS
SUPPLIER SELECTION
• Analysis of the scoreboard
• Mechanism : off-line competitive bids, reverse auctions, or direct negotiations
• Multiplicity : single sourcing vs. multiple sourcing
• Selection → on the basis of total cost of using a supplier and not just the
purchase price.
CONTRACT
• For Product Availability and Supply Chain Profits
• For Coordination of Supply Chain Costs
• For Increasing Agent Effort
• For Inducing Performance Improvement
Ideally, a contract should be structured to increase the firm’s profits and
supply chain’s profit, discourage information distortion, and offer
incentives to the supplier to improve performance along key dimensions.

6. Kripa Shanker IIT Kanpur 6
SUPPLIER SELECTION AND CONTRACTS
CONTRACT
For Product Availability and Supply Chain Profits
Double Marginalization :
• demand is significantly impacted by retail price
• uncertainty in demand
Contracts for product availability and supply chain profits while countering double
marginalization: • Buyback or returns contracts
• Revenue-sharing contracts
• Quantity flexibility
CONTRACT
To Coordinate Supply Chain Costs
Quantity discounts can coordinate supply chain costs if the supplier has large
fixed costs per lot. Quantity discounts, however, increases information distortion
due to order batching.

7. Kripa Shanker IIT Kanpur 7
SUPPLIER SELECTION AND CONTRACTS
CONTRACT
To Increase Agent Efforts
Two-part tariffs and threshold contracts can be used to counter double
marginalization and increase agent effort in a supply chain. Threshold contract,
however, increases information distortion and are best implemented on a rolling
horizon.
CONTRACT
To Induce Performance Improvements
Shared savings contracts can be used to induce performance improvement from
a supplier along key dimensions, such as lead time, where the benefit of
improvement accrues primarily to the buyer, whereas the effort for improvement
comes primarily from the supplier.

8. Kripa Shanker IIT Kanpur 8
DESIGN COLLABORATION
Design collaboration with supplier can help a firm reduce cost, improve quality,
and decrease time to market. As design responsibility moves to suppliers it is
important to ensure design for logistics and design for manufacturability
principles are followed. To be successful, manufacturers will have to become
effective design coordinators in the supply chain.

9. Kripa Shanker IIT Kanpur 9
PROCUREMENT PROCESS
MATERIALS
• Direct materials
• Indirect materials
Direct Materials Indirect Materials
Use Production Maintenance, repair, and
support operations
Accounting Costs of goods sold General Administration
Impact on production Any delay will delay
production
Less direct impact
Processing cost
relative to value of
transaction
Low High
Number of transaction Low High

10. Kripa Shanker IIT Kanpur 10
PROCUREMENT PROCESS
 The procurement process for direct materials should focus on improving
coordination and visibility with the supplier.
 The procurement process for indirect materials should focus on
decreasing the transaction cost for each order.
 The procurement process in both cases should consolidate orders to
take advantage of economies of scale and quantity discounts.

11. Kripa Shanker IIT Kanpur 11
PROCUREMENT PROCESS
MATERIALS
Categorization by
Value/Cost and Criticality
High
Critical Items Strategic Items
Low
General Items Bulk Purchase
Items
Low High
Value/Cost
Criticality
Indirect Materials
Direct Materials
Direct Materials
Direct Materials

12. Kripa Shanker IIT Kanpur 12
SOURCING PLANNING AND ANALYSIS
 Procurement spending should be analyzed by part and supplier to
ensure appropriate economies of scale.
 Supplier performance analysis should be used to build a portfolio of
suppliers with complementary strengths:
• cheaper but lower performing suppliers should be used to supply the
base demand, whereas
• higher performing but more expensive suppliers should be used to
buffer against variation in demand and supply from the other
source.

13. Kripa Shanker IIT Kanpur 13
SOURCING DECISIONS IN PRACTICE
 Use multifunctional teams.
 Ensure appropriate coordination across regions and business units.
 Always evaluate the total cost of ownership.
 Build long-term relationship with key suppliers.