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Strategic Sourcing

Strategic Sourcing. Dr. Ron Lembke Operations Management. Old View of the World. One company does all processing, from raw material through delivery. Vertical Integration. Henry Ford’s River Rouge Plant Owned forests, iron mines, rubber plantation, coal mines Ships, railroad lines

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Strategic Sourcing

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  1. Strategic Sourcing Dr. Ron Lembke Operations Management

  2. Old View of the World • One company does all processing, from raw material through delivery

  3. Vertical Integration • Henry Ford’s River Rouge Plant • Owned forests, iron mines, rubber plantation, coal mines • Ships, railroad lines • Dock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track • 1927 Model A Production begins • 15,000,000 cars in 15 years • 120,000 employees in WWII

  4. Supply Network View of the World • Integrated international networks of companies process, produce and distribute products.

  5. Spring Hill, Tennessee

  6. Saturn Layout

  7. Computer Example • Wacker Siltronic makes silicon wafers: • buy sand • grow into long crystals • slice into thin wafers

  8. Chip Production • Chip burned in a $2b “wafer fab” • Wafer cut into chips and “packaged”

  9. CD Drive • Chip stuffed onto board by Flextronics, Celestica, etc. • CD drive assembled by separate contract manufacturer • Green Printed Circuit Board from different supplier • CD drive, with a brand name on it, sold to Gateway

  10. Apple and Foxconn • EMS elect mfg services • Foxconn: • Shenzhen, mile square • 1 million workers • Largest private employer in China • 90 million iPhones • Global CE industry = $150b • Foxconn = 40% = $60b

  11. Headline Risk • 10 hour days, crowded dorms • Terry Gou:Clean, affordable • Good food • 17 suicides in 10 yrs • ¼ rate US college students • 9 in March-May 2010 • Below national average • HK ngo:12hr*13days iPad? • Counseling, outsource dorms • 10,000 horses galloping

  12. Low High Low Efficient Responsive High Risk-Hedging Agile Supply Chain Designs Demand Uncertainty • Efficient – economies of scale • Risk-Hedging – pooled resources, multiple sources of supply, share inv., need good IT • Responsive – Changing consumer needs, mass customization, build-to-order • Agile – responsive to changing needs, pooled resources Supply Uncertainty

  13. Modular Components • Take advantage of modules: parts or products previously prepared • Restaurants: prepared ingredients, assembled to order • Suppliers can develop new, interesting products to use more quickly, cheaply • Variety is gained by different combinations of same components

  14. Bullwhip Effect • Lack of information sharing can cascade through the supply chain. • Small changes at retail level lead to huge swings at manufacturing, like a bullwhip • Several retailers order all at once, distributor thinks sales have jumped, orders a much bigger order, etc. • Better: sales info shared along “Value Chain.” Graph: Disney & Towill, 2006, Supply Chain Mgt: An Intl J

  15. Electronic Data Interchange • My computer talks to yours, tells you exactly what I want to order, when • You fill out a form, very compressed message sent, viewed as form • Software, hardware expensive to implement Sample Purchase Transaction ST88850*1 Transaction Set identifier BEG*00*NE*00498765**010698 Beginning of Segment PID*X*08*MC**Large Widget Description of Product P01**5*DZ*4.55*TD Baseline Item Data CTT*1 Transaction Totals SE*1*1 End of Segment

  16. XML • eXtensibleMarkup Language • Perfect for E-Business • XML provides self-describing information. • Easier to implement or modify than EDI. • Expected to eventually, replace EDI, but not nearly as fast as was expected. • Standardization through RosettaNet efforts

  17. XBRL • Standardized set of tags for financial transaction • Identifies data as being Q3 EBITDA, 2011, for WidgetCo. • No rekeying, fewer errors, easier research • 2009 - SEC required for external reporting, 500 largest public cos. • XBRL.org

  18. Strategic Sourcing • Has to be feasible to outsource • Assembly line balancing – probably not a step in the middle • Figure out what to buy from whom • What do we want to accomplish? • More effective! • More efficient! • Continuous Process Improvement?

  19. Outsourcing - What is it? • Transfer activities to outside providers • Outside providers do activities • Resources: people, facilities, equipment • Decision-making responsibility • OEM = Original Equipment Manufacturer • name on the product, does not produce • Flextronics/Solectron, Foxconn makes it for you

  20. Outsourcing – Why do it? • Organizationally-driven reasons • Focus on what you do best • More flexible capacity • Employees: career paths • Improvement-driven reasons • Better quality & productivity, cycle time • Gain skills not otherwise available • Associate with superior providers • Financially-driven reasons • Reduce assets, improve ROA • Lower fixed costs • Cash from selling capital equip.

  21. DIY: Lower cost No capable suppliers Inadequate supply Competitive Issues Core competencies Specialization Low purchase cost Lack of capacity Want to gain skill Reduce inv. costs Management focus Patent issues Make or Buy Decision Reasons to Make Reasons to Buy

  22. Other Factors • Degree of coordination with other activities • Relationship-specific investments • Easy to copy technologies, or low IP (intellectual properties) protection • Second-tier sub-suppliers

  23. What to not Outsource • Core activities • Key to the business • Do not confer competitive advantage • Strategic activities • Key source of competitive advantage • X-box – Microsoft never considered making • Flextronics in Guadalajara • $5 / hr vs. $1 in Doumen, China

  24. A CautionaryTale • In 1981, IBM ‘PC’. • Consumers care about hardware • No one cares about the software that lets them talk to the processor. • Outsourced the OS to whom?

  25. Anybody heard of “Microsoft?” • UCSD Pascal $450 • CP/M $175 • MS-DOS $60 IBM: 2005 Lenovo $1.75b MS: 2010 After Tax $18b

  26. Outsourcing in the News • The World Is Flat • Bandwidth glut of dot-com boom • IT & telecommunications changes • Nobody can tell you’re calling India • White collar jobs – now it’s serious • Educated workforces • Call centers, programmers • Privacy / security concerns

  27. Mass Customization • Highly customized • Integrate design, processes, supply network • Supply components cheaply to production points • Fast, responsive production, quick delivery • Higher weight, lower value

  28. Supply Chain Technologies • ASN -- lets customer know exactly what has been sent • Drop Shipping -- Supplier sends directly to the store, not to store’s warehouse • Computer sent to house via UPS • 3PL: Third-party Logistics Provider • Trucking companies, manage inventories, anything you don’t want to do

  29. Managing the Supply Chain • Postponement -- withhold any modification until as long as possible. Keep product generic “vanilla” • HP • Benetton • Home Depot paint department • Channel Assembly -- have distributor assemble products from components

  30. HP Inkjet Printers • Printers made in Vancouver, sent via ship through Panama Canal to Europe • Europe warehouse stocks inventory by country • physically different-- power supply • manuals different languages • Substitution not allowed • Re-supply time very long

  31. Euro Plugs • No standardized power supplies for Europe • Different power supply for every country.

  32. HP Inkjet Printers • Redesigned printers so that power supply added in Europe • Re-engineer product, power supply • Assembly done in a warehouse (Quality?) • Manuals added in Europe • Many expensive changes • Store ‘vanilla’ boxes – one pile • Piles of power supplies & manuals • Cheaper to store than printers • Postpone point of differentiation • 25% cost reduction Hau Lee, Corey Billington, Brent Carter, Interfaces, 1993

  33. Delayed Customization Before Production Storage Shipping Storage After

  34. Benetton • Sweaters of undyed wool, dyed once demand is known • Dyeing LT much faster than production • How many undyed sweaters to make? • How many Red, Green, Blue, also, if this production process is cheaper, and you know you’ll sell some minimum amount?

  35. Behr Paints • Small # of bases • Small # tints • Unlimited # combinations • Keep stock colors on hand? • How many gallons? • Which ones? • Lower labor costs • Higher inventory costs

  36. Supply Chain Performance • Inventory Turnover (turns) = Cost of goods sold / Average inv. Value • Annual sales = $3m at cost, avg inv $500k • Turns = $3m/$500k = 6.0 • Fill Rate = Percentage of orders shipped on time • Shipped 1500 orders last month, 1462 left on time, in full • Fill Rate = 1462/1500 = 0.9747

  37. Weeks of Supply • Weeks of supply (annual avg) = • (Avg Inv Value / Annual CoGS )*52 Weeks • Annual sales = $30m, CoGS=$25m, Avg Inv = $2.5m • Turns = $25m/$2.5m = 10.0 • Weeks of Supply = $2.5m/$25m*52=5.2wks

  38. Weeks of Supply-Real Time • Predicted sales(at cost) over next month • Weeks Supply = • sales next month=$4m, at cost=$3.2m • weekly CoGS=$0.8m • Current Inv (at cost) = $2.2m • Weeks Supply = $2.2m/$0.8m = 2.75 wks Current Inventory $ at cost Forecasted Sales per week at cost

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