Materials Management BUS 3 – 141 Global Sourcing and Supply Organization Nov 15, 2011

1. Materials ManagementBUS 3 – 141Global Sourcing and Supply Organization Nov 15, 2011

2. Global Sourcing

3. Reasons for Global Sourcing • Items are not available in the United States (e.g. Coffee, precious metals) • Price (especially for highly labor-intensive items) • Government incentives • Faster / better support of Customers in the region • High Volume makes the business case • Product design stable or changes easy to implement • Repeatable, manufacturable Quality requires minimal buyer support

4. Potential Problems in Global Sourcing • Additional Lead time • Additional Inventory required • Quality • Logistics and transportation costs and issues • Source location and evaluation • Expediting • Political and labor problems • Currency fluctuations • Tariffs and duties • Language and communications • Legal problems • Hidden costs A careful business case is required to validate that the problems are offset by significantly lower total cost of ownership than what can be sourced domestically

5. Inventory Risk in Global Sourcing Longer Lead Time pulls in Reorder Point, and Increases Pipeline INVENTORY Extra Inventory Earlier Reorder Point cycle stock ROP ROP = L × d TIME lead time (L) Longer Lead Time increases Reorder Point, and Increases Pipeline

6. Other Inventory Issues in Global Sourcing • Obsolescence • Damaged In Transit • Missing In Transit • Lost • Stolen

7. Hidden Costs • Business Travel • Some Overhead still required in the US • Commissions to customs brokers • Fees for consultants, inspectors • Exchange Rate differentials • Extra paperwork/documentation • Freight forwarder • Warehousing • Port handling • Possible political issues with customers • Personnel, Recruiting, and Retention issues in the US • Price Protection / Discounts can negate cost savings

8. Career Opportunities and Risks

9. Career Implications • Emphasis on Value • Critical requirement for Unique Skills • Benefits of continuous Learning • Expatriate opportunities • Fluency in other language(s) a differentiator • Leveraging offshore experience

10. Global Supplier Management

11. Prerequisites for International Sourcing • Professional Purchasing staff • Professional Logistics staff • Legal department in-house or on retainer • Information Technology applications and infrastructure • Volumes to support the Business Case

12. Company records Catalogs (online and printed) Trade Journals and Trade Shows Advertisements Supplier and commodity directories The Internet Sales contacts and interviews Colleagues, networking, professional contacts Suppliers can be found through many sources From Chapter 10

13. Factors to Consider when Selecting Suppliers Technical, Engineering and Operations • Quality History • Quality Systems • Design Engineering capability • Sustaining Engineering capability • Facilities and Equipment • Output Capacity • Ability to ramp up and down quickly • Long term potential • Flexibility and responsiveness • Track record of cost reductions • Logistics expertise From Chapter 10

14. Finding International Sources Same Process as domestic sourcing, with a few Exceptions • Internet • Government Websites and Publications • U.S. Department of Commerce • Chambers of Commerce in selected cities • Brokers and Consultants • Thomas Register equivalents • Supply Departments from non-competing businesses Benchmarking and sharing “lessons learned” with non-competing businesses is valuable beyond Supply issues (e.g. Systems Selection and Implementations, Acquisitions, Change Management)

15. Evaluating International Sources Same Process as domestic evaluations, with a few Exceptions • Detailed questionnaires • Phone interviews • Product samples • Sample receipts and order processing • Leveraging technical staff experience • Strategic Visits • Consultants and representatives in Region

16. Organizing for Global Sourcing • Centralized Control vs. Autonomy vs. Hybrid • Management commitment • Leverage expertise as a competitive edge • Recognize need for specialists if no expertise exists in-house • Commodity Teams • Identify world-class suppliers, regardless of location • Local purchasing groups focus on continuous supply; commodity teams negotiate selection and deals • Regional Purchasing Offices • International Purchasing Offices

17. Cultural Considerations and Social Customs • Pictures, graphics, and numbers are more effective communication than speaking • Keep as much as possible in writing • Use interpreters for key meetings and negotiations • Avoid using first names until you are invited • Avoid slang, jargon, and metaphors (“Pig and Chicken”) • Get advice from people in your own company • Know as much as possible about the country (countries) where you will do business • Visit as often as possible, taking time to know the culture in addition to business issues

18. International Purchasing Specialists • Import brokers and agents • Help find suppliers • Handling paperwork and interaction with local import/export agencies • Import merchants • Buy products and takes title. Then they resell and deliver to the buyer • Trading companies • Handle a wide variety of products and services to and from a particular country or region (e.g. Japanese companies use trading companies to move goods into North America) • Similar to Distributors in the U.S.

19. Free Trade Zones (FTZ) Isolated, enclosed area in (or adjacent to) a port of entry, used to import, process, and reship products to foreign markets Major functions are • Storage • Manufacturing • Transshipments • Exhibition and Display Main purpose is to save TIME and MONEY • Avoid, postpone, or reduce Tariffs • Avoid, postpone, or reduce Paperwork

20. Metrics: Supply Organization Performance

21. Benefits of Measurement Systems • More likely to achieve objectives by focusing on priority areas • Data collection for corrective action to improve performance • Uncovers training needs • Isolates the impact of resources on performance • Personnel • Technology • Provides information to senior management • Opportunity to recognize and reward superior performance You get what you MEASUREand what you EXPECT

22. Types of Performance Measurement Efficiency Performance to a Standard (e.g. Time to place a Purchase Order, PO’s placed per hour, etc.) Emphasis is Value-Added activities Utilization Per cent of time that is devoted to Value-Added activities Productivity Efficiency * Utilization Effectiveness The Contribution that the activity / department provides to the overall mission of the business

23. Performance to Standard (Purchase Price Variances – PPV) Performance to reduction targets Transportation Costs Relationship with Inventory levels (to avoid excessive volume buying) Purchasing operations and effectiveness Price Delivery • Number of Stock-outs • Number of Delays and Reschedules attributable to Supply issues • On-Time delivery Quality • Incoming rejections • Production scrap • Field failures Department Performance • Transaction volumes per employee • Budget compliance • Controllable Inventory

24. Purchase dollars as % of sales dollars Purchase operating expense as % of sales dollars Purchase operating expense as % of Spend Purchase operating expense per purchasing employee Purchasing employees as % of company employees Purchase spend per purchasing employee Per cent of purchase spend managed / controlled by Purchasing Total cost savings as a percent of total savings Cost avoidance savings as a percent of total savings Cost reduction savings as a percent of total savings Per cent of active suppliers accounting for 80% of purchase spend Per cent of spend with diversity suppliers Per cent of purchase spend using Strategic Alliances Technology usage Suppliers connected Spend dollars using e-procurement Spend dollars using e-auctions Spend dollars using procurement cards Benchmarks: Center for Advanced Purchasing Studies (CAPS) Very useful for general planning; most valuable when tailored to business size and industry

25. Dependent on Sales and Production Can vary as business conditions vary Specific “A” items sometimes budgeted separately Supply Department Budgets Spend (Direct and Indirect) to support Operations Maintenance, Repair, and Operating Supplies (MRO) • Budgeted at a macro level, rather than at an Item level • Often ratio-based • Enabled by Technology Capital • Tied to future technology and capacity • Requires the longest planning horizon • Generally part of cross-functional budgets and activities Administrative / Operating • Salaries • Travel • Allocations

26. Metrics: Supplier Performance

27. Cost Reductions On-Time Delivery Rejects Contribution to Design Time to Market Hitting cost targets Percent of design transferred Responsiveness Upside demand and pull-ins Downside demand and push-outs Ease of doing business Billing discrepancies Shipping discrepancies Supplier Performance Metrics Not all metrics carry the same Weight. Scorecard emphasis is generally on Quality, Cost, & Delivery Purpose is to enhance Supplier Performance and provide data for future NEGOTIATIONS

28. Metrics: Buyer Performance

29. Continuity of Supply Cost variance to standards Understanding ERP system, or other transaction systems Number of Purchase Orders Placed Understanding selected Commodities Understanding company’s industry Supplier On-Time Delivery Cycle Time between Requisition and PO placements Compliance to standards Continuing education Professional certifications Entry Level Buyer Performance Metrics

30. Understanding Production processes Cycle time to analyze MRP and issue requisitions Operations efficiency Component inventory levels Entry Level Buyer / Planner Performance Metrics Buyer metrics, plus:

31. Continuity of Supply Cost reductions Proficiency in ERP system Expertise in one (or a few) Commodities Expertise in company’s industry Number of Strategic Purchase Orders Placed Professional activities Supplier performance Supplier development Inventory Levels Experienced Buyer Performance Metrics

32. Continuity of Supply Cost reduction targets and achievements Technology usage and leadership Leadership in professional societies Leadership in company’s industry Supplier performance Supplier development New suppliers identified and utilized Commodity management Cross-functional team leadership Buyer development Department efficiency and effectiveness Strategic capacity management Professional leadership Budget performance Customer satisfaction Revenue growth and Market Share Inventory turns Purchasing Manager / Executive Metrics

33. Other Getting out of DEBT & Managing Cash Flow