MIM 524Global Sourcing

Class three

Chicken or Egg?

Which Comes First?Organization?Strategy?Does function dictate structure or does

structure dictate functionality?Does strategy dictate organization or does

organization influence strategy?

Structure

• Organizational challenges• Structure• Logistics

– Inventory Optimization– Carrier Optimization

Organizational Structure ConsiderationsCentralized Vs Decentralized International Purchasing

Organization (IPO)Functional Vs Geographical

ProximityGeneralists Vs Specialists

Separate Vs Integrated (with end users)

Centralized Vs DecentralizedCentralized has the following advantages

Standardized Process and ControlsEasier tracking of spends, trends, etc.Allows for “pooling of purchase” to drive

better overall deals and supportUniform support across multiple locations

DisadvantagesLack of local customization – small unique

needs may not be supportedLogistical issues – Ex: Bulk spendsLess integration with end users (Ivory Tower

Perceptions)

International Purchasing Organizations (IPO)Blended strategies of specialists in specific

geographical locationsThey specialize in “how” to source in those

specific geographies Leveraged by many large MNC’s (multi-national

companies)Singapore, Taiwan and Hong Kong – high

concentrationsIPO’s typically compliment and leverage centralized

commodity teamsProvide input, trends and potential new

emerging sourcesReceive input from commodity specialists on

overall engagement models, benchmarking and indicators.

Functional Vs GeographicalFunctional allows for

A deep investment in the understanding of specific commodities

Commodity expertise is very high and a competitive advantage

One stop shop globally for all support in that unique commodity area

Geographical proximity allows forBetter integration with all internal customers

(large and small)Better response times and flexibility for

customers

Separate Vs Integrated Emergence of Business Ethics

SOX – Sarbanes Oxley Anti-trust Issues Fiduciary responsibility

How do we ensure we are wisely using company funds? Separate Function/Organization Provides

Standard Training and Controls Monitoring Confidentiality, Insider Trading, etc.

Checks and Balances on DecisionsStep away from the business operations

Monitoring of Conflict of Interest When might integrated be a better option?

Strategic Planning

MissionVisionStrategies

Long Term Action PlanCommits Organizational ResourcesCreates Competitive Advantage

Performance Measures

Three enabling strategiesThree enabling strategies

Supply ChainStrategy

BusinessProcesses

People

InformationTechnologyeBusiness

Strategy #2: Enhance our relationships through the

Chain

Strategy #1: Re-engineer and improve Supply Chain business

processes

Strategy #3: Create electronic capabilities to run

competitive Supply Chains

Strategic Planning & The Source FunctionElements of a strategy

Long term vision Broad reaching – competitive advantage Sustainable and repeatable Drives optimized results Deliberate Resource commitment

Emerging Trends Outsourcing Collaboration/Joint Development/Venture Supplier Enabling Low cost geographies Methods of optimizing existing supply base

Consolidation Expansion Single, sole or Multi sourcing Long term relationships VS transactional events Fulfillment

Strategies at different levels…Corporate StrategiesSupply StrategiesCommodity Strategies Individual Supplier Strategies

Corporate Strategies Focuses on market position

How do we retain or take lead in market segment shares? What competitive advantages do we utilize Leader or Lager – Cost, Quality, etc.

Customer Profile Size (OEM, ODM, Distribution, Channel, End Users – AKA Joe

Customer) Location (Geographies, Proximity to Metro Areas, other) Demand Profile – What do they need now and in the future

What does the market expect? Growth? What % Investment/Innovation? R & D, Patents, etc.

Technology/Product Life Cycles Emerging Technologies Complimentary products/technologies Time to Market or Lager?

Mission and Culture How will the company utilize it’s resources to deliver results

Purchasing and Sourcing Strategies

Commodity StrategiesHow many suppliers?

Opportunity to consolidate? Expand to drive competition? M & A Impact Custom Vs Standard?

Location of suppliers? Proximity to source of use? Supply chain considerations Low cost geo’s?

Performance of supply base Cost Rabbit Technology leaders Quality levels and overall performance to current demand

Measured by Supplier Report CardsMake Vs BuyGlobal Sourcing OptionsEnabling/Investment for competitive Advantage

Licensing Deals

Commodity Strategic PlansSourcing Research

Commodity Studies/Global Market analysisForecasting/Management of ChangeValue analysis/Product StudiesSupplier StudiesBenchmarking/Market Analysis

Training and EducationUnderstand the environment, economy and related

factorsNewspaper, professional publications, etc.

Supplier StrategiesDetermine which Segment they support?

One time transaction Supply agreements Commodity – Stable Commodity – Changing Strategic Make VS Buy

Leader or Lagger Cost, Quality, etc.

Investing in the future Enabling/Licensing Training/BKM Sharing (Best Known Methods) - TQM Away Teams

Performance – Financially?Allocation Strategy

Single Source? Multi Source? % of total

Supply Strategies Volume buys – Pool of purchaseMOQ – Minimum Order QuantitiesInventory investments

JIT ARM (auto replenishment model) Consignment – Min Inventory, Min Turns Third Party Logistics (3PL’s) – optimize TPT Hub (owned) – optimize TPT (through put time) In House Min/Max

Logistics method and INCO TermsTPT Flexibility

Expedite Upside/Downside Cancellation Windows

How transaction is managed? (Req to Settle Flow) PO – discrete Blanket PO Erelease/ereceipt –Rosetta net (EDI/Internet) PCard Catalog/Web orders Barcode/RFID

Supplier Strategies

Single Source – Collaboration Strategy Share long term roadmaps Commit to long term contracts and relationship DFX (Design for Cost or Manufacturing or Supply Chain)

Multi Source – Competition Strategy Market/competition driven pricing and performance Allocation negotiation strategies (Possible Reverse

Auction)Transactional – Fulfillment Strategy

Focus on easy of procurement – typically automated Supplier catalogs with wide selections High Transactions Low cost

INVENTORY COSTS

Costs to acquireOrdering costsSetup costs

Carrying costsStockout costs

LO 1

Cash-to-Cash Cycle Time0ENLI009

Inventory days + Days sales outstanding – Average payment of supply period for materials

Inventory0OPPLAN012

Forecast Accuracy

0OPPLAN008

Production Lead Times

0OPMAKE017

Perfect Order Fulfillment

0OPDEL061

Faultless Invoices

0OPDEL023

Scheduled Achievement

0OPMAKE022Delivery

Performance to Scheduled Commit Date

0OPDEL019

Returns0OPDEL067

Scrap0OPMAKE023

Fill Rates0OPDEL025

Order Fulfillment Lead Time

0OPPLAN030

Machine wait time0OPMAKE007

Yield0OPMAKE033

Number of Supply

Sources0OPSO012Total Source

Lead Time0OPSO041

0ENLI015

Sales0ENPR026

0ENLI0030OPPLAN017

Strategic

Leverage

Commodity

Bottleneck

Supplier Management Strategies by Segment/Size

Small SupplierLow Scalability

Mid Size SupplierMarginal Scalability

Large SupplierScalability

Mega SupplierHigh Scalability

Supplier Size and Scalability – Flexibility and Willingness to Invest

II

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Man

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IIIIII

IVIV

Acquire/Equity Investment or

Reduce

Simplify

Alliance/Collaborate

Outsource/Enable

Su

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Man

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Purchasing StrategiesStrategic Supplier Long Term ContractsPurchase Orders Technologies

Internet/EDIBar Coding, RFID TagsERP CapabilitiesReverse AuctionsSupplier CatalogsElectronic PO’s Contracts and Signatures

PCardsOutsourcing the transaction process

Analysis and SelectionAnalysis and SelectionSupplier Certification

QualificationAuditingTesting and SamplingStat Process ControlQOM – Quality Operating SystemsTQRDCE – hp model

Comparative PerformanceWhat are the competitors using?What are other segments of the corporation

using?What are others outside the industry using?

Supplier Analysis & Selection

QualityResourcefulness

Service

Cost

Technology

Availability

LOGISTICS

LogisticsWhat is it..

Freight CarriersPro’s and Con’s of each type (Air, Water, Ground (truck

or Rail) Freight Forwarders Customs Brokers Third Party Logistics (3PL’s) Agents

Who should be responsible for it Who pays? Who manages customs clearance? Who pays duties? When does Title transfer? INCO Terms

Critical Logistics IssuesTimely Service

On TimeConsistent

Technology InfrastructureInformation AvailabilityInformation Accuracy

Efficient Use of Logistics AssetsTransportation AssetsFacilitiesInventories

Critical Logistics IssuesCost Effective Services

Entire Logistics SystemIntegration

Of Organizational Activities Of Supply Chains Of Modes

Capacity Constraints Containers and Ports Airports

Risks Damage (Moisture, Vibration, Contamination, Impact) Pilferage/Theft/Replaced (countfeit) Lost/Un-trackable

Logistics StrategiesSimilarity to ProductsCommodity Strategy

Standard Service Needs?Custom Service Needs?Which Modes Will Be Used?How Many Carriers are Necessary?

•What Characteristics?•Make/Buy Analysis

Key Logistics System FeaturesCycle Time / Lead TimeConsistency of CyclesOrder AccuracyConsolidationProblem Notification/ResolutionCustomer Satisfaction/FeedbackFlexibility / ResponsivenessCost

Enhanced EB Indicators that optimize the Enhanced EB Indicators that optimize the Supply Chain PotentialSupply Chain Potential

S-Chain indicators (*)

"Plan" (demand/supply

plng)

"Source" (Materials)

"Make" (Production)

"Deliver" (Order fulfillment and distribution)

Total Chain

Operating Cost

Cost of plan generation

Material acquisition rate

Factory labor rateCost of order

admin and shipping

Supply chain costs as a % of revenue

Cycle TimeForecast cycle

timeMRP requirements to material receipt

Build cycle time Order

entry/execution time

Customer request to receipt of order

Flexibility

# of line item plan changes

processed in X days

% supplier upside in X days

% capacity upside in X days

% order entry and order execution upside in X days

% orders delivered to

customer request date

InventoryFinished goods Days Of Supply

Raw material DOS WIP DOSFinished goods

DOSTotal pipeline

DOS

Etc(*) Includes selected indicators. There are other functional and supply chain indicators not listed here.

"Stovepipe" indicators (*)

Logistics StrategiesUninterrupted Supply of Inbound Material

Supplier SelectionForecasting of Supply Information Sharing Inbound Transportation

Facility Numbers and LocationsLocal WarehousesDistribution Centers

Inventory Quantities and LocationsTimely Distribution of Necessary Materials

Forecasting of DemandOutbound Transportation

Services Provided By 3PL’s

Transportation Mgt21%

Private Fleets7%

Intermodal4%

Warehousing21%

Value Added20%

International9%

Integrated9%

Other5%

Lead Logistics4%

An Example

Current In Bound Logistics Flow

Raw

Materials

ODM1 HK FF

ODM2 HK FF

ODM1

ODM2

HK

3PL

ODM3 HK FF ODM3

ODM5 HK FF ODM5

ODM6 HK FF ODM6

Proposed Flow

Raw

Materials

ODM1

ODM2

HK

3PL

ODM3

ODM5

ODM6 H

K R

aw M

aterial 3PL

Assigned Reading

The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell by Joan

Magretta

Case Team Break Out

Current Events

Next Class Scott Case Submittal Due at Beginning of Class Sourcing Strategies, Supplier Selection Price/Cost Analysis Scott Case Presentations Current Events

Questions?

Back up Foils

EOQ: DefinitionEOQ: Definition

Is a model that calculates the best quantity to order or

produce. (Economic Order Quantity)

LO 1

TOTAL COST is a function of:TOTAL COST is a function of:

The total cost (TC) formula includes the following:P = $25 per order [cost of placing & receiving order (setup & production)]D = 10,000 [known demand]Q = 1,000 [order size (or production lot size)]C = $2 per unit [carrying cost of 1 unit for 1 year]

The total cost (TC) formula includes the following:P = $25 per order [cost of placing & receiving order (setup & production)]D = 10,000 [known demand]Q = 1,000 [order size (or production lot size)]C = $2 per unit [carrying cost of 1 unit for 1 year]

LO 1

FORMULA: Total CostTotal cost looks at all inventory costs.

P.214 of V.W.

LO 1

Total cost (TC) equation:

= Ordering cost + Carrying cost

= PD/Q + CQ/2

PD/Q = [(10,000/1,000) x $25] = $ 250

CQ/2 = [(1,000/2) x $2] = $1,000

TC = $1,250

How can the total cost be reduced?

The EOQ model will compute the cheapest

batch order size.

LO 1

FORMULA: EOQEOQ is a calculation intended to lower total inventory costs.

LO 1

EOQ equation:

= √ 2 x Order costs ÷ Unit cost

= √ 2PD/C

= √ 2 x $25 x 10,000 / $2

= √ 250,000

= 500

What do you do with the order quantity calculated

by the EOQ model?

Enter the order quantity into the TC equation.

LO 1

FORMULA: EOQ CostEOQ Total cost calculates TC using the EOQ batch size in units to cut total cost by $250.

LO 1

Total cost (TC) equation:

= Ordering cost + Carrying cost

= PD/Q + CQ/2

PD/Q = [(10,000/500) x $25] = $ 500

CQ/2 = [(500/2) x $2] = $ 500

TC = $1,000

FORMULA: Reorder Point (ROP)

ROP identifies the proper time to place an order to avoid stockout.

LO 1

Reorder Point (ROP) equation:

= Rate of usage x Lead time

= 50 parts per day x 4 days

= 200 parts

FORMULA: Safety Stock

Safety stock provides a buffer to reorder point.

LO 1

Safety stock:

= Lead time x (maximum – average usage)

= 4 days x (60 – 50)

= 40 parts

FORMULA: ROP + Safety Stock

Safety stock adds a buffer to reorder point.

LO 1

Reorder Point (ROP) equation 14.4:

= Rate of usage x Lead time + Safety stock

= 50 parts per day x 4 days + 40

= 240 parts