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Sourcing Decisions

Sourcing Decisions. Chapter Objectives. Be able to: Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other. Perform a simple total cost analysis.

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Sourcing Decisions

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  1. Sourcing Decisions

  2. Chapter Objectives Be able to: • Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other. • Perform a simple total cost analysis. • Explain what a sourcing strategy is, and show how portfolio analysis can be used to identify the appropriate sourcing strategy for a particular good or service. • Show how multicriteria decision models can be used to evaluate suppliers, and interpret the results. • Discuss some of the longer-term trends in supply management and why they are important.

  3. Introduction • The sourcing decision • Sourcing strategies • Supplier evaluation • Trends in supply management

  4. Focus • Sourcing decisions –High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners • Purchasing – discussed in Chapter 11The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance Sourcing decisions and purchasing activities serve to link a company with its supply chain partners

  5. The Sourcing Decision • Insourcing –The use of resources within the firm to provide products or services • Outsourcing –The use of supply chain partners to provide products or services • Sourcing decisions are high-level, often strategic decisions that address: • What will use resources within the firm • What will be provided by supply chain partners Make-or-Buy Decision

  6. Advantages High degree of control Ability to oversee the entire program Economies of scale and/or scope Disadvantages Required strategic flexibility Required high investment Loss of access to superior products and services offered by potential suppliers Advantages and Disadvantages of Insourcing

  7. Advantages High strategic flexibility Low investment risk Improved cash flow Access to state-of-the-art products and services Disadvantages Possibility of choosing a bad supplier Loss of control over the process and core technologies Communication and coordination challenges “Hollowing out” of the corporation Advantages and Disadvantages of Outsourcing

  8. Factors Affecting the Decision to Insource or Outsource FavorsInsourcing FavorsOutsourcing Factor Environmental uncertainty low high Competition in the supplier market low high Ability to monitor supplier performance low high Relationship of product/service to high low buying firm’s core competencies

  9. Total Cost Analysis A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options • Direct costs – Costs that are tied directly to the level of operations or supply chain activities • Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity

  10. Insourcing and Outsourcing Costs Insourcing Outsourcing Directcosts Indirectcosts

  11. Portfolio Analysis High Complexity or Risk Impact Low Low High Value Potential

  12. Critical to profitability and operations Few qualified sources of supply Large expenditures Design and quality critical Complex and/or rigid specification Strategy Form partnerships with suppliers Tactics Increase role of selected suppliers Actions Heavy negotiation Supplier process management Prepare contingency plans Analyze market/competitions Use functional specifications Critical Quadrant

  13. Complex specifications requiring complex manufacturing or service process Few alternate productions/sources of supply Big impact on operations/maintenance New technology or untested processes Strategy Ensure supply continuity Tactics Decrease uniqueness of suppliers Manage supply Actions Widen specification Increase competition Develop new suppliers Medium-term contracts Attempt competitive bidding Bottleneck Quadrant

  14. High expenditures, commodity items Large marketplace capacity, ample inventories Many alternate products and services Many qualified sources of supply Market/price sensitive Strategy Maximize commercial advantage Tactics Concentrate business Maintain competition Actions Promote competitive bidding Exploit market cycles/trends Procurement coordination Use industry standards Active sourcing Leverage Quadrant

  15. Many alternative products and services Many sources of supply Low value, small individual transactions Everyday use, unspecified items Anyone could buy it Strategy Simplify acquisition process Tactics Increase role of systems Reduce buying effort Actions Rationalize supplier base Automate requisitioning, e.g., EDI, credit cards Stockless procurement Minimize administration costs Little negotiating Routine Quadrant

  16. Sourcing Strategies • Single sourcing –The buying firm depends on a single company for all or nearly all of an item or service • Multiple sourcing –The buying firm shares its business across multiple suppliers • Cross sourcing –Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part • Dual sourcing –Using two suppliers for the same purchased product or service

  17. Multicriteria Decision Models in Sourcing and Purchasing How do we evaluate alternatives when criteria include both quantitative measures (such as costs and on-time delivery performance) and qualitative factors (such as management stability and trustworthiness)?

  18. Weighted-Point Evaluation System - I Purpose: • Evaluating potential suppliers • Tracking suppliers’ performance over time • Ranking current suppliers The Process: • Assign weights to performance dimensions • Rate the performance of each supplier with regard to each dimension • Calculate the total score

  19. Weighted-Point Evaluation System - II Summary Data for Alternative Suppliers Aardvark Beverly Conan the Electronics Hills Inc. Electrician PerformanceDimension Price Quality Delivery reliability

  20. Criteria Weights Scoring Scheme WPrice = 0.3 WQuality = 0.4 WDelivery = 0.3 5 = excellent 4 = good 3 = average 2 = fair 1 = poor Weighted-Point Evaluation System - III

  21. Weighted-Point Evaluation System - IV Performance Values for Alternative Suppliers PerformanceDimension Price Quality Delivery reliability Aardvark Beverly Conan the Electronics Hills Inc. Electrician

  22. Weighted-Point Evaluation System - V Total Scores for Alternative Suppliers ScoreAardvark= (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6 ScoreBeverly= (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5 Score Conan= (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2 Aardvark should improve their qualityBeverly Hills should improve their delivery and priceConan is out of the running as a potential supplier

  23. Trends in Supply Management • Sustainable Supply* • Supply Base Reduction • Global Sourcing • Supply Chain Disruptions • Supply Chain Capacity • Transportation Costs

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