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"Managing Value in Supply Chain ‐ Case Studies on the sourcing hub Concept"
Suhas Kini.B B13175 Roopan Roy John B13168
Madhumitha R B13154 Nidhi Singh B13157
Santanu Mallick B13170 Saiyam Sanghvi B13169
THE SOURCING HUB
SUPPLY CHAIN MANGEMENT
1
TABLE OF CONTENTS
ABOUT THE PAPER [SECTION I]........................................................................................................ 2
RESEARCH METHODOLOGY AND RESULTS [SECTION – II] .......................................................... 3
RESEARCH FINDINGS AND IMPLICATIONS TO THE INDUSTRY [SECTION – III] .......................... 6
LIMITATIONS OF THIS RESEARCH [SECTION – IV] ......................................................................... 8
2
OPERATIONS
MANAGEMENT II
ASSIGNMENT
SUPPLY CHAIN MANGEMENT
Our paper for study was Managing Value in Supply Chain ‐ Case Studies
on the sourcing hub Concept by Anupam Agrawal from University of
Illinois at Urbana‐Champaign, Arnoud De Meyer Singapore
Management University, Luk N. Van Wassenhove INSEAD. This paper
was accepted in California Management Review, Winter, 2014.
WHAT EXACTLY IS A SOURCING HUB?
“The sourcing hub is an upstream entity in supply chains, focused on
developing collaborative relationships with an OEM's suppliers and
suppliers' RM suppliers.”
The hub can be deployed as a physical department or unit within an
OEM's organizational structure.
ABOUT THE
PAPER
[SECTION I]
This paper that we
have analyzed is
about a concept called
the Sourcing Hub. It
helps us revisit certain
concepts of Sourcing
and Supply chain
management. The
primary purpose of this
research is to integrate
information on
upstream Raw
Material suppliers so
as to add value to the
Supply chain.
3
RESEARCH METHODOLOGY AND RESULTS [SECTION – II]
For many companies, raw material is a huge part of the cost, there are lot of companies that source their
raw materials from different suppliers but again this kind of sourcing fails to recognize the common pool of
suppliers of raw materials which are actually upstream.
A sourcing hub tries to integrate all these suppliers in terms of commonalities that they provide to any
OEM.
The Methodology that the authors have followed is a case by case analysis to understand the sourcing
process in different companies. They have earmarked four companies for study namely
1. DMV in Germany,
2. TMV in India,
3. TDV in South Korea
4. BKI in France
Of these, the first three firms are automotive OEMs while BKI is automotive brakes supplier. The choice of
companies has also been made after careful analysis taking into consideration that the companies are from
different countries and also there are two firms (BKI and DMV) that are in the process of considering the
implementation of a sourcing hub, one firm that is now implementing the Sourcing hub concept (TMV), and
another firm that has already implemented it (TDV). If we look into Table 3, we can observe that there are
two different flanges that are made of the same material SS41. Hence, the information regarding all such
commonalities is tapped if a sourcing hub is made.
There were also two perspectives that were taken under consideration as follows :
Complexity perspective: Firms should gain visibility over their supply network and attempt to gain some
form of control over it as it is very complex.
Outsourcing /simplification perspective: Managing the network is complex and unrelated to the core focus
of the firm, then outsourcing should be way out.
They had made a questionnaire that tried to gather the required information. They visited the four
companies and presented a questionnaire to the different people who are responsible for sourcing. The
questioning is usually preceded by an Information exchange and an assurance for confidentiality.
4
The different types of information gathered during the survey follows a sequence that can be best
described as shown:
After this information is obtained they analyze individual scenarios that can happen in a company on a case
on case basis and they make the 2 propositions taking into consideration the 2 perspectives which were
mentioned earlier. The propositions made are as follows:
Proposition A:
As uncertainty increases, developing BOM‐based sourcing details of RM by working with RM suppliers for
components sourced from 1st tier suppliers can help decrease design‐, sourcing‐, and manufacturing‐related
complexity for the focal firms, the 1st tier suppliers, and the RM supplier.
Proposition B:
As the number of RM suppliers decreases and the RM content in the cost of goods sold increases, the
opportunity for value addition in upstream supply chain by (i) direct purchasing of RM, (ii) sharing demand
BOM based Raw Material Sourcing Knowledge
1. Creation and acces of BOM
2. Raw material Dtermination and usage
3. The effect of design and quality on raw materials
RM Sourcing network
1. Information on the major suppliers of these raw materials
2. Probing questions on Relationship with raw material suppliers
Sourcing costs and financing
1. Assesing Involvement in sourcing of Raw Materials
2. Finding out the decisions depending on RM supply
3. Financial Aspects, working capital etc.
5
information with 1st tier and RM suppliers, and (iii) production related information for the focal firms, the 1st
tier suppliers, and the RM supplier, increases.
Deployment of the Sourcing Hub
 The hub has sourcing individuals working full‐time on the related transactions, including
logistics and negotiations and also has the support of other departments such as finance,
IT, and others who are working part time in the hub.
 There are two types of costs involved in deploying the sourcing hub-‐ startup and ongoing.
 The startup cost relates to the detailing of raw material at the component level and establishing a
material database so that the raw material supply is streamlined.
 The raw material level details at the component bill of material level are normally not a part of the
day‐to‐day operations at other OEMs.
 In order to develop such a database, the OEM has to collate accurate raw material information, such
as grades, weights and sources of material, for each component.
 The hub has sourcing individuals working full‐time on the related transactions, including
logistics and negotiations and also has the support of other departments such as finance,
IT, and others who are working part time in the hub.
6
RESEARCH FINDINGS AND IMPLICATIONS TO THE INDUSTRY
[SECTION – III]
Eliminates the Bull whip effect
 The bullwhip effect can be explained as an occurrence detected by the supply chain where orders
sent to the manufacturer and supplier create larger variance then the sales to the end
customer. These irregular orders in the lower part of the supply chain develop to be more distinct
higher up in the supply chain. This variance can interrupt the smoothness of the supply chain
process as each link in the supply chain will over or underestimate the product demand resulting in
exaggerated fluctuations.
 The information obtained via survey is used for detailing the upstream Raw Material sourcing
network, including all suppliers' suppliers.
A simple model of Sourcing Hub with Multiple Raw material suppliers and Suppliers to OEMs
 This information is shared to these stakeholders about current and immediate future production,
about market demand, and new products.
Supplier 1
Supplier 2
SOURCING
HUB
Raw Material
Supplier 1
Raw Material
Supplier 2
Raw Material
Supplier 3
7
 This is a major step in trying to eliminate the Bull whip effect which may arise out of Information
asymmetry.
Collaborative design
 To start with, there would be interaction with the design and technical departments for sharing
knowledge on available technologies and Raw Material available from suppliers in order to help
improve design and development of current and new products.
 This leads to collaborative design so that the suppliers know what kind of materials to procure and
store.
 At the same time the OEMs can leverage upon the knowledge of the suppliers to understand the
right kind of material needed for any application.
 It also provides vital information while entering new markets.
 Suppose a material needs some processing to be done, then the supplier can schedule can process
accordingly. This gives rise to Concurrent Engineering.
Here by direct sourcing from the Raw materials the intermediate costs of the immediate suppliers is
eliminated thereby bringing about cost savings.
Reducing Ordering Costs:
 We all know that Economic Order Quantity is = √(2DS/H). So the EOQ can be brought down by
reducing the value of the ordering cost.
 In its sourcing hub, TDV manages complete transactions for RM sourcing via an online web‐
based system.
 Hence this type of a system though different from an e- procurement system would help in
bringing down the ordering costs considerably.
Single Supplier Concept:
As we can see this concept of sourcing hub would bring about the optimization of network of
suppliers thereby reducing the dependency on suppliers. If we look into table 5, we can observe
since the sourcing Hub is implemented, though there are 23 different suppliers, there is only one
raw material supplier.
8
LIMITATIONS OF THIS RESEARCH [SECTION – IV]
Restriction to Automobile Industries:
This research is restricted only to Automobile Industries and hence the suitability of this concept
for other industries cannot be justified. For example in Industries which have Job Shop
production, every job is a new variety and hence optimizing the requirement of Raw Materials is
difficult.
Increased dependency:
In this case becoming increasingly dependent on one Raw material supplier would put the firm in
a tough spot because of the following two reasons:
1. The Firm may be in financial trouble or may not be able to supply goods due to some
calamity.
2. The firm may place restrictions or become demanding as it is the sole supplier or one
among the few suppliers for the OEM.
Transfer of Technology:
Working closely to the OEM makes the supplier come to know about technologies /processes that
may be strategic or critical to the company in which case there may be a breach of trust or the Raw
material supplier can come up as a new competitor.
Imported Components/Cycle time:
In defense and space applications, there are some specific requirements of the process which
requires greater precision and hence they are imported. This concept cannot be tried in those
cases. Also the cycle time must be considered and if purchasing the parts is economic, we should
go for purchasing them directly.

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The Sourcing Hub in SCM

  • 1. "Managing Value in Supply Chain ‐ Case Studies on the sourcing hub Concept" Suhas Kini.B B13175 Roopan Roy John B13168 Madhumitha R B13154 Nidhi Singh B13157 Santanu Mallick B13170 Saiyam Sanghvi B13169 THE SOURCING HUB SUPPLY CHAIN MANGEMENT
  • 2. 1 TABLE OF CONTENTS ABOUT THE PAPER [SECTION I]........................................................................................................ 2 RESEARCH METHODOLOGY AND RESULTS [SECTION – II] .......................................................... 3 RESEARCH FINDINGS AND IMPLICATIONS TO THE INDUSTRY [SECTION – III] .......................... 6 LIMITATIONS OF THIS RESEARCH [SECTION – IV] ......................................................................... 8
  • 3. 2 OPERATIONS MANAGEMENT II ASSIGNMENT SUPPLY CHAIN MANGEMENT Our paper for study was Managing Value in Supply Chain ‐ Case Studies on the sourcing hub Concept by Anupam Agrawal from University of Illinois at Urbana‐Champaign, Arnoud De Meyer Singapore Management University, Luk N. Van Wassenhove INSEAD. This paper was accepted in California Management Review, Winter, 2014. WHAT EXACTLY IS A SOURCING HUB? “The sourcing hub is an upstream entity in supply chains, focused on developing collaborative relationships with an OEM's suppliers and suppliers' RM suppliers.” The hub can be deployed as a physical department or unit within an OEM's organizational structure. ABOUT THE PAPER [SECTION I] This paper that we have analyzed is about a concept called the Sourcing Hub. It helps us revisit certain concepts of Sourcing and Supply chain management. The primary purpose of this research is to integrate information on upstream Raw Material suppliers so as to add value to the Supply chain.
  • 4. 3 RESEARCH METHODOLOGY AND RESULTS [SECTION – II] For many companies, raw material is a huge part of the cost, there are lot of companies that source their raw materials from different suppliers but again this kind of sourcing fails to recognize the common pool of suppliers of raw materials which are actually upstream. A sourcing hub tries to integrate all these suppliers in terms of commonalities that they provide to any OEM. The Methodology that the authors have followed is a case by case analysis to understand the sourcing process in different companies. They have earmarked four companies for study namely 1. DMV in Germany, 2. TMV in India, 3. TDV in South Korea 4. BKI in France Of these, the first three firms are automotive OEMs while BKI is automotive brakes supplier. The choice of companies has also been made after careful analysis taking into consideration that the companies are from different countries and also there are two firms (BKI and DMV) that are in the process of considering the implementation of a sourcing hub, one firm that is now implementing the Sourcing hub concept (TMV), and another firm that has already implemented it (TDV). If we look into Table 3, we can observe that there are two different flanges that are made of the same material SS41. Hence, the information regarding all such commonalities is tapped if a sourcing hub is made. There were also two perspectives that were taken under consideration as follows : Complexity perspective: Firms should gain visibility over their supply network and attempt to gain some form of control over it as it is very complex. Outsourcing /simplification perspective: Managing the network is complex and unrelated to the core focus of the firm, then outsourcing should be way out. They had made a questionnaire that tried to gather the required information. They visited the four companies and presented a questionnaire to the different people who are responsible for sourcing. The questioning is usually preceded by an Information exchange and an assurance for confidentiality.
  • 5. 4 The different types of information gathered during the survey follows a sequence that can be best described as shown: After this information is obtained they analyze individual scenarios that can happen in a company on a case on case basis and they make the 2 propositions taking into consideration the 2 perspectives which were mentioned earlier. The propositions made are as follows: Proposition A: As uncertainty increases, developing BOM‐based sourcing details of RM by working with RM suppliers for components sourced from 1st tier suppliers can help decrease design‐, sourcing‐, and manufacturing‐related complexity for the focal firms, the 1st tier suppliers, and the RM supplier. Proposition B: As the number of RM suppliers decreases and the RM content in the cost of goods sold increases, the opportunity for value addition in upstream supply chain by (i) direct purchasing of RM, (ii) sharing demand BOM based Raw Material Sourcing Knowledge 1. Creation and acces of BOM 2. Raw material Dtermination and usage 3. The effect of design and quality on raw materials RM Sourcing network 1. Information on the major suppliers of these raw materials 2. Probing questions on Relationship with raw material suppliers Sourcing costs and financing 1. Assesing Involvement in sourcing of Raw Materials 2. Finding out the decisions depending on RM supply 3. Financial Aspects, working capital etc.
  • 6. 5 information with 1st tier and RM suppliers, and (iii) production related information for the focal firms, the 1st tier suppliers, and the RM supplier, increases. Deployment of the Sourcing Hub  The hub has sourcing individuals working full‐time on the related transactions, including logistics and negotiations and also has the support of other departments such as finance, IT, and others who are working part time in the hub.  There are two types of costs involved in deploying the sourcing hub-‐ startup and ongoing.  The startup cost relates to the detailing of raw material at the component level and establishing a material database so that the raw material supply is streamlined.  The raw material level details at the component bill of material level are normally not a part of the day‐to‐day operations at other OEMs.  In order to develop such a database, the OEM has to collate accurate raw material information, such as grades, weights and sources of material, for each component.  The hub has sourcing individuals working full‐time on the related transactions, including logistics and negotiations and also has the support of other departments such as finance, IT, and others who are working part time in the hub.
  • 7. 6 RESEARCH FINDINGS AND IMPLICATIONS TO THE INDUSTRY [SECTION – III] Eliminates the Bull whip effect  The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer. These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain. This variance can interrupt the smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations.  The information obtained via survey is used for detailing the upstream Raw Material sourcing network, including all suppliers' suppliers. A simple model of Sourcing Hub with Multiple Raw material suppliers and Suppliers to OEMs  This information is shared to these stakeholders about current and immediate future production, about market demand, and new products. Supplier 1 Supplier 2 SOURCING HUB Raw Material Supplier 1 Raw Material Supplier 2 Raw Material Supplier 3
  • 8. 7  This is a major step in trying to eliminate the Bull whip effect which may arise out of Information asymmetry. Collaborative design  To start with, there would be interaction with the design and technical departments for sharing knowledge on available technologies and Raw Material available from suppliers in order to help improve design and development of current and new products.  This leads to collaborative design so that the suppliers know what kind of materials to procure and store.  At the same time the OEMs can leverage upon the knowledge of the suppliers to understand the right kind of material needed for any application.  It also provides vital information while entering new markets.  Suppose a material needs some processing to be done, then the supplier can schedule can process accordingly. This gives rise to Concurrent Engineering. Here by direct sourcing from the Raw materials the intermediate costs of the immediate suppliers is eliminated thereby bringing about cost savings. Reducing Ordering Costs:  We all know that Economic Order Quantity is = √(2DS/H). So the EOQ can be brought down by reducing the value of the ordering cost.  In its sourcing hub, TDV manages complete transactions for RM sourcing via an online web‐ based system.  Hence this type of a system though different from an e- procurement system would help in bringing down the ordering costs considerably. Single Supplier Concept: As we can see this concept of sourcing hub would bring about the optimization of network of suppliers thereby reducing the dependency on suppliers. If we look into table 5, we can observe since the sourcing Hub is implemented, though there are 23 different suppliers, there is only one raw material supplier.
  • 9. 8 LIMITATIONS OF THIS RESEARCH [SECTION – IV] Restriction to Automobile Industries: This research is restricted only to Automobile Industries and hence the suitability of this concept for other industries cannot be justified. For example in Industries which have Job Shop production, every job is a new variety and hence optimizing the requirement of Raw Materials is difficult. Increased dependency: In this case becoming increasingly dependent on one Raw material supplier would put the firm in a tough spot because of the following two reasons: 1. The Firm may be in financial trouble or may not be able to supply goods due to some calamity. 2. The firm may place restrictions or become demanding as it is the sole supplier or one among the few suppliers for the OEM. Transfer of Technology: Working closely to the OEM makes the supplier come to know about technologies /processes that may be strategic or critical to the company in which case there may be a breach of trust or the Raw material supplier can come up as a new competitor. Imported Components/Cycle time: In defense and space applications, there are some specific requirements of the process which requires greater precision and hence they are imported. This concept cannot be tried in those cases. Also the cycle time must be considered and if purchasing the parts is economic, we should go for purchasing them directly.