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Chapter 6. Developing a Supply Strategy. Fundamentals. Corporate Strategy: An action plan designed to achieve specific long-term goals and objectives Organizations approach strategic planning on three levels: Corporate Business Unit Function. Fundamentals, cont. Mission Statement
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Chapter 6 Developing a Supply Strategy
Fundamentals • Corporate Strategy: Anactionplan designed to achieve specific long-term goals and objectives • Organizations approach strategic planning on three levels: • Corporate • Business Unit • Function
Fundamentals, cont Mission Statement Objectives Corporate Strategies Business Unit Strategies
Fundamentals, cont Mission Statement Objectives Corporate Strategies Business Unit Strategies Marketing Strategies Operations Strategies Purchasing Strategies, etc.
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
Purchasing Strategies:Two General Categories • Strategic Purchasing Processes • Detailed Commodity Strategies
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
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
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
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
Developing a commodity strategy with Portfolio Analysis HIGH Annual spend LOW LOW Supply risk HIGH
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
In which quadrants are the greatest opportunities for performance improvement? HIGH Annual spend LOW LOW Supply risk HIGH
Commodity Teams Develop a Sourcing Strategy based upon: • Portfolio Analysis • Requirements • Market research • Supplier Analysis
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
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
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
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
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)
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
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
The Phases of Developinga Supply Strategy • I. Basic Beginnings • II. Moderate Development • III. Limited Integration • IV. Full Integration: Purchasing is now “Strategic Sourcing”
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