Strategic Sourcing

1. Strategic Sourcing Dr. Ron Tibben-Lembke

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. Strategic Sourcing • Figure out what to buy from whom • What do we want to accomplish? • More effective! • More efficient!

11. 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 or Solectron makes it for you

12. 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.

13. 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

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

15. 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

16. Outsourcing Example • 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?

17. Anybody heard of “Microsoft?” • UCSD Pascal $450 • CP/M $175 • MS-DOS $60 IBM: ‘05 Lenovo $1.75b MS: 2007 EBITDA $25b

18. Outsourcing in the News • 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

19. Supply Chain Performance • Inventory Turnover (turns) = Cost of goods sold / Average inv. Value • Weeks of supply = ( Avg. Inv Value / CoGS ) * 52 Weeks • Fill Rate = Percentage of orders shipped on time

20. 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

21. 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

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

23. 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

24. 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

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

26. 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 • Postpone point of differentiation • 25% cost reduction

27. Delayed Customization Before Production Storage Shipping Storage After

28. 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?

29. 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

30. 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 information shared across the “Value Chain.”

31. 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

32. Supply Chain Technologies • ASN -- lets customer know exactly what has been sent • Standardization -- reduce number of variations of a part in use • Drop Shipping -- Supplier sends directly to the store, not to store’s warehouse

33. XML • eXtensible Markup Language • Standard for E-Business • XML provides self-describing information. • Much easier, faster to implement or modify than EDI. • Expected to eventually, replace EDI, but not nearly as fast as was expected. • Standardization through RosettaNet efforts