Sourcing Strategy Development

1. Sourcing Strategy Development BUS 416W FALL 2002

2. Purchasing and Supply Chain Management Purchasing Strategy

3. The strategy of an organization, or of a subunit of a larger organization, is a conceptualization of: Long-term objectives and purposes of the organization Broad constraints and policies that restrict activities Current set of action plans and near-term goals expected to help achieve an organization’s objectives Defining Strategy

4. Strategy Levels Corporate Level Strategies

5. Data Collection Sources Internet Searches www.transportlink.com www.thomasregister.com www.stats.bls.gov/ppihome.htm Prior Purchase Files Discussions with users, customers, purchasing colleagues and others

6. Purchasing and Supply Chain Management Portfolio Analysis

7. Portfolio Analysis

8. Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Acquisition Fewer capable suppliers within a region Low priority items Fewer total dollars spent May consume a disproportionate amount of time and dollars to acquire Developed quality and technology Able to move easily between suppliers--low switching costs Focus on removing effort and transactions through low dollar purchase systems

9. Portfolio Analysis Strategy emphasis: Acquisition Automate ordering/releasing systems Simplify processes and procedures Off-load ordering to users or suppliers through low value purchase systems Standardize and streamline where possible

10. Low Value Purchases

11. Low Value Purchases Key Question--

12. Low Value Purchases Firms that have made greater progress in managing low value purchases…….. Emphasize certain methods, approaches, or activities when reducing the effort or transactions required to process low value purchases (in order of effect): 1 On-line ordering through the use of electronic catalogs 2 Procurement cards issued to users 3 Electronic commerce through the internet

13. Low Value Purchases 4 Purchasing process redesign efforts 5 Automated accounts payable systems 6 Allowing users to contact suppliers below some dollar threshold 7 Consolidation of purchase requirement between units 8 Auto fax with suppliers 9 Electronic data interchange with suppliers 10 Electronic funds transfer payments

14. Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Multiple Greater number of suppliers Low to medium annual dollars Able to move easily between suppliers--low switching costs Developed quality and technology Focus on price analysis to gain benefit

15. Portfolio Analysis Strategy emphasis: Multiple Let market forces work Play the market--perform price analyses Periodically market test Apply pressure Short-term commitments (with the option to renew)

16. Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Leverage Greater number of suppliers Medium to high annual dollars Win-win approach may work here Focused commodity families Combining contracts across units yields savings Developed quality and technology Able to move easily between suppliers Focus on cost and price analysis

17. Portfolio Analysis Strategy emphasis: Leverage Combine volumes for lower cost May use a longer-term agreement Use target costing Probe for efficiencies or improvements

18. Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Strategic Few capable suppliers Items or services critical to success Unique or customized items Collaborative or interdependent relationships Unable to move between suppliers easily Cost analysis yields benefits Unproven or undeveloped technology Win-win environment

19. Portfolio Analysis Strategy emphasis: Strategic Joint ventures/alliances/partnerships Practice reverse marketing Develop collaborative relationships Pursue annual cost/price/quality/cycle time improvement goals Use of longer-term agreements

20. Commodity Study Guidelines Pages 191-193 in Textbook

21. Supply Management Strategy Formulation Discussion question

22. What are past expenditures by commodity and by supplier? What are expenditures as percent of total for business unit? What is the technology roadmap, and that of the supplier? What are current / future volumes and user location requirements? Are there opportunities to leverage commodity expenditures with similar commodities? Are You Able to Answer the Following Questions?

23. Who are current and potential suppliers? What are the characteristics of the marketplace (best price, average price, etc.) What are future trends in terms of supply continuity and expected pricing What are strengths and weaknesses of your suppliers, and who are the market leaders? Are You Able to Answer the Following Questions?

24. Insource or outsource? Cost-vs. market-based approach Type of suppliers? High or low technology Full service Niche or distributor Local or global supplier? Single, dual or multiple source? Percentage of buy to each supplier? Key Commodity Strategy Questions

25. Long-term or short-term contract? Evergreen or escape clause? Degree of buyer/supplier risk taking? On-line or manual ordering? Supplier development - degree of commitment? Use full-service suppliers? “Black box” or traditional level of supplier involvement in design? Key Commodity Strategy Questions

26. Ensure clear metrics with linkages to business unit strategies Use internal / external metrics to evaluate progress Hold “post-mortems” on successful and failed strategies Modify strategy as necessary Hold stakeholder meetings and provide feedback Measure and Evaluate Strategy Performance

27. Translating Objectives into Purchasing Goals

28. Commodity Strategy Development Process

29. Portfolio Analysis Approach

30. Example of Goal Setting Increase volume and market share through pricing reduction Reduce cost of goods by 20% Reduce purchase prices (with redesign) by 25% in 12 months Develop lower cost production processes or modify design resulting in 25% lower prices

31. 31 Stages of Strategy Evolution