Chapter 6

1. Chapter 6 Developing a Supply Strategy

2. Fundamentals • Corporate Strategy: Anactionplan designed to achieve specific long-term goals and objectives • Organizations approach strategic planning on three levels: • Corporate • Business Unit • Function

3. Fundamentals, cont Mission Statement Objectives Corporate Strategies Business Unit Strategies

4. Fundamentals, cont Mission Statement Objectives Corporate Strategies Business Unit Strategies Marketing Strategies Operations Strategies Purchasing Strategies, etc.

5. Fundamentals, cont. • Developing purchasing strategy involves translating purchasing objectives into purchasing goals • OBJECTIVES: - Open-ended - Portrayed in relative terms - Usually an external focus • GOALS: - Time-anchored - Quantitatively specific - Usually an internal focus EXAMPLE: Objective is to be the industry’s low-cost producer. The associated goal might be to reduce costs by 10% within the next twelve months

6. Purchasing Strategies:Two General Categories • Strategic Purchasing Processes • Detailed Commodity Strategies

7. Major Supply Strategy Areas: • Assurance of Supply Strategies • Cost Reduction Strategies • Supply Base Strategies • Technology/New Product Development Strategies • Quality Management Strategies • E-procurement Strategies • Global Sourcing Strategies • Insourcing/Outsourcing Strategy

8. A Major focus area today isCost Reduction Strategies • Long-term success of a firm depends upon its ability to differentiate itself from the competition AND make a profit • Profit = Revenue - Cost

9. A Major focus area today isCost Reduction Strategies • Long-term success of a firm depends upon its ability to differentiate itself from the competition AND make a profit • Profit = Revenue - Cost Increasing P X Q is more difficult than reducing cost

10. Purchasing Strategies often involve Commodity Strategies • Commodity Teams • Consolidation of requirements • Supplier quality certification • Supply base reduction & award contracts • Management of supplier relations • Commodity Portfolio Analysis

11. Developing a commodity strategy with Portfolio Analysis HIGH Annual spend LOW LOW Supply risk HIGH

12. Summary points on the Quadrants • Transactions Quadrant • Price is important; competitive bidding • Don’t want to focus primary attention here! • Bottleneck Quadrant • Get out of here with specification changes, standardization, or develop new sources • Leverage Quadrant • Consolidate requirements • Strategic Quadrant • Build alliances or at least partnerships

13. In which quadrants are the greatest opportunities for performance improvement? HIGH Annual spend LOW LOW Supply risk HIGH

14. Commodity Teams Develop a Sourcing Strategy based upon: • Portfolio Analysis • Requirements • Market research • Supplier Analysis

15. The Sourcing Strategy presented to management • Number of suppliers and the amount of business to award to each • Recommended suppliers • Method of placement • Nature of the relationship • Type of contract and length of contract

16. Summary of the commodity strategy process • Organize a commodity team • Portfolio Analysis • Develop the strategy for the commodity or commodity group • Execute the strategy by negotiation and contract award • Review the strategy at least annually

17. The complex and critical issue of insourcing/outsourcing strategy • Make-or-Buy versus Insourcing/Outsourcing • Applies to services as well as materials • Two primary areas of focus • Why decisions are consequential

18. Formal Decision Process for insourcing/outsourcing strategy • Step 1: What are our core competencies? Where is the strategic “fit”? • Step 2: Cost Analysis • Step 3: Consider the risks associated with outsourcing • Step 4: Decision and implementation

19. Cost Analysis • Difficult and somewhat subjective • What factory costs beyond direct should be included? Insourcing Costs ٠Direct Labor ٠Direct Materials ٠Overhead ٠(Other) Outsourcing Costs ٠Quote or negotiated value for FOB Destination ٠(Other)

20. Summary reasons for insourcing • Lower Cost • Buyer firm has superior processes • Greater assurance of supply • Necessary for design secrecy • Allows company to absorb overcapacity • Quantities too small, no supplier interested

21. Summary reasons to buy outside • Lower cost • Superior capabilities available in the supplier community • Firm lacks production capacity • Customers demand this supplier component • Challenge of maintaining long-term technology road maps in a certain area • Assures cost accuracy

22. The Phases of Developinga Supply Strategy • I. Basic Beginnings • II. Moderate Development • III. Limited Integration • IV. Full Integration: Purchasing is now “Strategic Sourcing”

23. What is happening in purchasing today • Nontraditional people as Directors of Purchasing • Technical entry route into purchasing • Emphasis on the process of purchasing rather than the transactions—a new way of thinking • Strategic cost management • Reformulation of the supplier base • Web-based fulfillment processes • MRO items handled by a third party • Purchasing-engineering-supplier synergy • Dichotomizing the strategic and the routine

24. Let’s move on