Global Sourcing �and Procurement
Operations Management
Global Sourcing and Procurement
Strategic sourcing is the development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of the business.
The term sourcing was just another term for purchasing, a corporate function that financially was important but strategically was not the center of attention.
Global Sourcing and Procurement
Sourcing activities can vary greatly and depend on the item being purchased.
The term sourcing implies a more complex process suitable for products that are strategically important
The diagram positions a purchasing process according to the specificity of the item, contract duration, and intensity of transaction cost.
Global Sourcing and Procurement
Specificity refers to how common the item is and, in a relative sense, how many substitutes might be available.
Commonly available products can be purchased using a relatively simple process, other items require a more complex process.
A request for proposal (RFP) is commonly used for purchasing items that are more complex or expensive and where there may be a number of potential vendors.
Global Sourcing and Procurement
Vendor-managed inventory is when customers actually allows the supplier to manage the inventory policy of an item or group of items for them.
Selecting the proper process depends on minimizing the balance between the supplier’s delivered costs of the item over a period of time, say a year, and the customer’s costs of managing the inventory.
Global Sourcing and Procurement
The Bullwhip Effect
In many cases, there are adversarial relations between supply chain partners, as well as dysfunctional industry practices such as a reliance on price promotions.
Consider the common food industry practice of offering price promotion every January on a product. Retailers respond to the price cut by stocking up, in some cases buying a year’s supply, a practice the industry calls forward buying.
Global Sourcing and Procurement
A program called continuous replenishment that typifies what many manufacturers are doing to smooth the flow of materials through their supply chain.
Global Sourcing and Procurement
Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations.
Because such products satisfy basic needs, which do not change much over time, they have stable, predictable demand and long-life cycles.
But their stability invites competition, which often leads to low profit margins.
Global Sourcing and Procurement
To avoid low margins, many companies introduce innovations in fashion or technology to give customers and additional reason to buy their products.
These innovative products typically have a life cycle of just a few months.
Global Sourcing and Procurement
A stable supply process is where the manufacturing process and the underlying technology are mature, and the supply base is well established.
An evolving supply process is where the manufacturing process and the underlying technology are still under early development and are rapidly changing.
Global Sourcing and Procurement
Using the supply and demand characteristics, four types of supply chain strategies are possible. Information technologies play an important role in shaping such strategies.
Strategy | Description |
Efficient supply chains. | These are supply chains that utilize strategies aimed at creating the highest levels of cost efficiency. |
Risk-hedging supply chains. | These are supply chains that utilize strategies aimed at pooling and sharing resources in a supply chain so that the risk in supply disruption can be shared. |
Responsive supply chains. | These are supply chains that utilize strategies aimed at being responsive and flexible to the changing and diverse needs of the customers. |
Agile supply chains. | These are supply chains that utilize strategies aimed at being responsive and flexible to customer needs, while the risk of supply shortages or capacity resources. |
Global Sourcing and Procurement
Outsourcing is the act of moving some of a firm’s internal activities and decision responsibility to outside providers.
Reasons why a company decides to outsource: |
Financially Driven Reasons
|
Improvement Driven Reasons
|
Organizationally Driven Reasons
|
Global Sourcing and Procurement
Logistics Outsourcing
There has been dramatic growth in outsourcing in the logistics area.
Logistics
Management functions that support the complete cycle of material flow from the purchase and internal control of production materials, to the planning and control of work-in-process; to the purchasing, shipping and distribution of the finished product.
Global Sourcing and Procurement
Green Sourcing
Green sourcing is not just about finding new environmentally friendly technologies or increasing the use of recyclable materials.
It can also help drive cost reductions in a variety of ways including product content substitution, waste reduction, and lower usage.
Global Sourcing and Procurement
Total cost of ownership
The total cost of ownership is an estimate of the cost of an item that includes all the costs related to its procurement and use, including any related costs in disposing of the item after it is no longer useful.
Global Sourcing and Procurement
Measuring sourcing performance
One view of sourcing is centred on the inventories that are positioned in the system. Inventory serves as a buffer, thus allowing each stage to operate independently of the others.
Measure / Indicator | Description |
Inventory turnover | A measure of supply chain efficiency. |
Cost of god sold | The annual cost for a company to produce the goods or services provided to customers. |
Average aggregate inventory value | The average total value of all items held in inventory for the firm, valued at cost. |
Weeks of supply | Preferred measure of supply chain efficiency that is mathematically the inverse of inventory turnover times 52. |
Global Sourcing and Procurement
Measuring sourcing performance
The objective is to have the proper amount of inventory and to have it on the correct locations in the supply chain.
Inventory turnover = Cost of goods sold
Average aggregate inventory value
Weeks of supply = Average aggregate inventory value
Cost of goods sold
x 52 weeks