The World is Flat ( 世界是平的 ) (Thomas Friedman)

1. The World is Flat (世界是平的) (Thomas Friedman) Procurement

2. Outsourcing: An “easy way” to increase profits Procurement

3. Case ― Positive1 • Nike • Outsources almost all of its manufacturing activities • Focuses mainly on research and development on the one hand, and marketing, sales, and distribution on the other • Growth in the 90s at an annual rate of about 20 percent Procurement

4. Case ― Positive2 • Cisco • Global virtual manufacturing strategy • Quadruple in size from 1994 to 1998 • Apple Computer • Outsources 70 percent of its component • Focused its internal resources on its own disk operating system and the supporting macro software Procurement

5. Case ― Negative1 • Nike • 2001, profit shortfall due to inventory buildup in some products, shortages for others as well as late deliveries • Reason • Weak U.S. economy • Complications with the implementation of a supply planning system Procurement

6. Case ― Negative2 • Cisco • 2000, 2.25 billion write-down for obsolete inventory • Reason • A significant reduction in demand for telecommunication infrastructure to which Cisco was not able to respond effectively • Apple Computer • 1999, the ability to satisfy customer demand was significantly reduced • Reason • Shortages in the G4 chip supplied by Motorola Procurement

7. Outline • Outsourcing benefits and risks • A framework for buy/make decisions • E-procurement • A framework for e-procurement Procurement

8. Outsourcing Benefits • Economies of scale reduce manufacturing costs • Risk pooling – demand uncertainties are transferred • Reduced capital investment • Focus on core competencies • Increased flexibility • 較佳的回應顧客需求改變的能力 • 利用供應商的技術來加快產品研發週期時間的能力 • 獲得新技術及創新的能力。 Procurement

9. 案例 • 自助餐廰的滷蛋… • 西餐廳的麵包… • 汽車廠的輪胎… • 腳踏車變速器… • K牌腳踏車―只有車架自行生產… • 有Dolby最動聽… Procurement

10. Outsourcing Risks • Loss of competitive knowledge • 將重要組件委外給供應商，就等同於給競爭者機會(一如IBM的例子) • 公司失去100%以自己的想法去導入新設計的能力，而亦須參酌供應商的想法 • 將重要組件委外給不同的供應商，也就失去了一些傳統上必須團隊合作才可行的發展，如新的想法、創新及整體解決方案等。 • Conflicting objectives • Flexibility (例如，JIT) vs. long-term、 stable commitments, etc. Procurement

11. A Framework for Outsourcing1(Fine and Whitney) • Reasons for outsourcing • Dependency on capacity • 企業本身具有製造組件所必須的專業知識及技巧，因為其他的因素而決定委外。 • Dependency on knowledge • 企業並沒有製造產品或組件所必要的人員、技術及專業知識，故將其委外以補其不足。即使如此，企業仍需具備評估顧客需求的技巧和知識，並將之轉換為產品應有的主要特徵及要求。 • Product architecture • Modular products –independent components • Integral products – components are tightly related Procurement

12. A Framework for Outsourcing2(Fine and Whitney) • Modular products –independent components • Components are independent of each other • Components are interchangeable • Standard interfaces are used • A component can be designed or upgraded with little or no regard to other components • Customer preference determines the product configuration Procurement

13. A Framework for Outsourcing3(Fine and Whitney) • Integral products – components are tightly related • Designed as a system • Not off-the-shelf components • Evaluated based on system performance • Components in integral products perform multiple functions Procurement

14. A Framework for Outsourcing4(Fine & Whitney) Procurement

15. 案例 • TOYOTA • 70%的零組件委外… • 引擎―100%自製 • 汽車電子系統―由供應商設計並製造(依賴產能與知識) • IBM • CPU委外… • 作業系統委外… Procurement

16. Procurement process is highly complex, requires significant expertise, and is very costly. Procurement

17. 電子市集是最後綠洲？ Procurement

18. E-Marketplaces: The Initial (95-99) business model • The e-marketplace concept started as a new way to procure products, particularly non-production items. E-marketplaces • Expand everyone’s market reach • Generate lower price for the buyers • Cut operational costs for buyers and suppliers • Automating the procurement process will reduceprocessing cost per order from as high as $150 to as low as $5 per order • Focus on liquidity • Transaction fee paid by the suppliers • Serve as a virtual distributor Procurement

19. The value of e-markets • 提供了採購流程的專業知識及大量的供應商 • 做為買家及供應商之間的媒介 • 找出節省成本的機會 • 在拍賣喊價的過程中增加自己供應商的資料庫 • 找到供應商，確認其是否合乎自己的需求，並給予必要的支援 。 • 代為處理拍賣、出價事宜。 Procurement

20. The Move to B2B Commerce Procurement

21. 2003$1.3 Trillion Business-to-Consumer Business-to-Business 2002$843B 2001$499B 1999$109B 1998$43B 2000$251B B2B is Huge... Procurement Source: Forrester Research, Inc.

22. Continuous evolution of the business model1 • Transaction fees (paid by either the buyer, the suppliers, or both.) • Problems with this Business Model • Sellers resist paying a fee to the company whose main objective is to reduce the purchase price • Buyers resist paying a fee • The revenue model needs to be flexible • Sometimes the wrong party is charged • Low barriers to entry created a fragmented industry flooded with participants • Just in the chemical industry there were about 30 e-markets Procurement

23. Continuous evolution of the business model2 • Subscription fees (會員費) • 電子市集依照公司大小、使用系統的員工人數及成交筆數，作為向會員收取費用的依據 • Licensing the software • 指的是市集將其軟體授權給企業使用，讓企業可以透過軟體自動連上市集 Procurement

24. Evolving Market Types ―Value-added independent ( public) e-markets • They are expanding their value proposition by offering addition services such as inventory management and financial services (Zoho); supply chain planning (Covisint， e2open) Procurement

25. Consider Instill Corp. • Instill.com focuses on the food service industry and provides an infrastructure which links together operators, i.e., restaurants, distributors and manufacturers. This e-marketplace provides value to its customers by offering not only procurement services, but also forecasting, collaboration and replenishment tools. Procurement

26. Evolving Market Types ―Private e-Markets • Valuechain.Dell.com (Dell), eHub (Cisco) • IBM, Sun Microsystems and Wal-Mart • 台塑網電子商務 • These companies use the marketplace to improve supply chain collaboration • Providing suppliers with demand information and production data Procurement

27. Evolving Market Types ―Consortia-based e-markets • Covisint (automotive―GM，Ford Motor，DaimlerChryler，Renault，Nissan，Mitsbishi，Peugeot…); Trade-Ranger (oil); Omnexus (chemicals); e2Open and Converge (high-tech) • 聯盟型電子市集和公開電子市集相似，差別在於公開電子市集為獨立經營，聯盟型是由同一產業內的數家公司所聯合建立． • Objective of the consortia is • Aggregate activities and use the buying power of consortia members • Provide suppliers with standard systems that support all buyers and allows suppliers to reduce cost Procurement

28. Evolving Market Types ―Content based e-markets1 • Integrating catalogs from many industrial suppliers. To achieve scale and increase efficiencies, cntent-based e-markets unify suppliers’ catalogs and provide effective tools for searching and comparing suppliers’ products. • 物流電子交易市集 Procurement

29. Evolving Market Types ―Content based e-markets2 • First focus • Maintenance, Repair and Operations (MRO) goods • These are components that are not part of the finished product or the manufacturing process but are essential for the business • Examples include lighting, office supply, fasteners,… • Second focus • Industry-specific products Procurement

30. E-marketplace Examples Independent VerticalExchanges (IVX) Independent Horizontal Exchanges (IHX) Consortia TradingExchanges (CTX) Private Trading Exchanges (PTX) Procurement

31. Procurement

32. Private vs. consortium-based public markets ― example • Automotive Industry • Covisint was established in early 2000 by the Detroit’s big three automakers • It now also includes Renault, Nissan, Mitsubishi and Pegeot • Volkswagen established its own private e-market • Volkswagen e-market provides not only similar capabilities to that of Covisint but also real-time information on production plans so that suppliers can better utilize resources Procurement

33. E-markets allow buyers to increase market reach, better collaborate with suppliers, and remove inefficiencies from their supply chains. How to choose the e-market type? Procurement

34. The appropriate procurement strategy depends on the type of product the firm is purchasing as well as the level of riskthe firm is willing to take. Procurement

35. Factors of procurement strategy― Type of Component1 • Strategic Components • Part of the finished product • Not only industry specific but also company specific • Typically are integral products • Examples: PC motherboard and chassis Procurement

36. Factors of procurement strategy― Type of Component2 • Commodity Products • Can be purchased from a large number of suppliers • Price is determined by market forces • Typically are modular components • Examples: Memory unit in a PC • Indirect Material • MRO (maintenance, repair, and operation) Procurement

37. Factors of procurement strategy― Level of Risk1 • Uncertain Demand (Inventory risk) • Volatile market price (Price Risk) • Component availability (Shortage Risk) Procurement

38. For example ―Risk: Commodity Products • Can be purchased either • in the open market through on-line auction, or • through the use of long term contracts • Long term contracts guarantee certain level of supply but may be risky for the buyer • Inventory risk, shortage risk or price risk Procurement

39. A Framework for e-Procurement― Indirect Material • Typically low risk and hence the focus is on content based hubs. • The objective is to use an MRO-hub that specializes in unifying catalogs from many suppliers Procurement

40. A Framework for e-Procurement― Strategic Components • Typically high risk components that can be purchased from a small number of suppliers • The objective is to use private or consortia-based e-marketplace. (VW vs. Covisint) • The focus is on an e-marketplace that allow collaboration with the suppliers Procurement

41. Strategic Components― Decision of Consortia or Private • Transaction volume (Consortia or Private) • Number of suppliers (Consortia or Private) • Cost of building and maintaining the site (Consortia or Private) • The importance of protecting proprietary business practices (Consortia or Private) • Technology and product life cycles (Consortia or Private) • The shorter the technology and product life cycles, the closer the required collaboration with key suppliers – private marketplace will be better. Procurement

42. A Framework for e-Procurement― Commodity Products1 • Products go directly into finished goods • High risk • Many potential options to choose from • Long Term Contracts • Flexible, or Option Contracts • Spot Purchasing Procurement

43. A Framework for e-Procurement― Commodity Products2 • Long Term Contracts • Buyer and supplier commit to certain volume (called the commitment level) • Supplier guarantees a level of supply for a committed price • Flexible, or Option Contracts • Buyer pre-pay a relatively small fraction of the product price up-front, in return for a commitment from the supplier to satisfy demand up to a certain level (called the option level) • The buyer can purchase any amount up to the option level by paying additional price for each unit purchased Procurement

44. A Framework for e-Procurement― Commodity Products3 • Spot Purchasing • Buyers look for additional supply in the open market. In this case, the firm should use an independent e-marketplace to select a supplier. Procurement

45. A Portfolio Approach of Commodity Products1 • 當實際需求比預測水準高，連基本承諾量和選擇水準的總和都無法滿足時，將因全面性的短缺，現貨市場的價格上揚，此時採現貨市場採購較為不利． • 廠商可決定長期契約之基本承諾量及彈性合約選擇水準，以在價格風險、缺貨風險及存貨風險間做出作適合的互抵水準． Procurement

46. Option Level H L N/A Inventory Risk (Supplier) Price, Shortage Risks (Buyer) Inventory Risk (Buyer) Commitment Level L H A Portfolio Approach of Commodity Products2 Procurement

47. B2B Software Vendors • Oracle (Indirect and Direct) • i2 Technologies and Manugistics (Direct) • Ariba (Indirect and Direct) • Commerce One (Indirect and Direct) • Agile (Direct) • VerticalNet (Indirect) Procurement

48. E-Procurement: The reality1 • Companies conducting greater than 20% of procurement transactions online have reduced their transaction processing cost by nearly a third (Hackett Benchmarking) • Product savings and process cost improvements effect operating cost by 10% (Credit Suisse First Boston Technology Group) Procurement

49. E-Procurement: The reality2 • To capture this benefits purchasing organization needs to invest heavily in: • Changing internal procurement processes • Integrating e-marketplaces in internal systems • Purchasing B2B applications, and • Paying e-marketplace transaction fee/subscription fee Source: Forrester Research Procurement

50. Positive Aspects of Trading Exchanges (Companies who use exchanges)1 • Reduce costs or labor (31%) • Better access to products/vendors (24%) • Increase speed or efficiency (29%) • Access to more customers (21%) Source: AMR Research Procurement