Chapter 4

Ethical and Sustainable

Sourcing

Prepared by Mark A. Jacobs, PhD

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
 LEARNING OBJECTIVES

You should be able to

Describe the difference between purchasing and
strategic sourcing
Describe how strategic sourcing plans are developed and
implemented
Define and describe the terms green sourcing, VMI, JIT
II, in-sourcing, co-sourcing, and co-managed inventories
Describe sourcings role in managing key supplier
relationships

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
 LEARNING OBJECTIVES (Continued)

You should be able to

Describe the performance criteria used in assessing
suppliers.
Describe how strategic supplier relationships can impact
the firm.
Describe how a reverse auction works.
Understand the importance of sharing the benefits of
strategic partnerships.
Understand the strategic role played by the purchasing
function in developing & improving the supply chain.

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
 CHAPTER OUTLINE

Introduction
Ethical and Sustainable Sourcing
Developing Ethical and Sustainable Sourcing Strategies
Supply Base Rationalization Programs
Ethical and Sustainable Supplier Certification Programs
Outsourcing Products & Services
Early Supplier Involvement
Strategic Alliance Development

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
 CHAPTER OUTLINE (Continued)

Use of e-Procurement Systems

Rewarding Supplier Performance
Benchmarking Successful Sourcing Practices
Using Third-Party Supply Chain Management Services
Assessing & Improving the Firms Sourcing Function

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
 Introduction

Sourcing - all of firms activities used to manage

external resources.
Strategic sourcing - managing the firms external
resources to support firms long term goals.
Drivers of Strategic Sourcing
Reduce costs & delivery cycle times
Improve quality & long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce high costs of globalization & materials,
Deliver more innovative products more frequently &
cheaply than competitors
 Ethical and Sustainable Sourcing
Strategies
Business Ethics is the application of ethical
principles to business
Corporate Social Responsibility is the practice
of business ethics
Ethical Sourcing is that which attempts to take into
account the public consequences of organizational
buying or bring about positive social change through
organizational buying behavior
 Ethical and Sustainable Sourcing
Strategies (Continued)

Ethical Policies should include

Determining where all purchased goods originated
and the manner in which they were made
Knowledge of the suppliers workplace principles
Inclusion of ethics as a performance rating
Independent verification of vendor compliance
Report of supplier compliance to stakeholders
Provision of detailed ethical sourcing expectations to
suppliers
 Ethical and Sustainable Sourcing
Strategies (Continued)

Sustainable Sourcing
Green purchasing is aimed at ensuring products or
materials meet environmental objectives e.g. waste
reduction, reuse and recycling
Sustainability is the ability to meet current needs of
the supply chain without hindering the ability to meet
future needs in terms of economic, environmental,
and social challenges
Considers worker safety, wages, working conditions, human
rights
 Ethical and Sustainable Sourcing
Strategies (Continued)

Sustainable Sourcing should seek to

Grow revenues
New sustainable product introduction
Reduce costs
Increase resource efficiencies
Manage risk
Link brand to social consciousness of consumer
Build intangible assets
Build social and environmental responsibility
 Ethical and Sustainable Sourcing
Strategies (Continued)

Functional Products - MRO items & other

commonly low profit margins with relatively stable
demands & high levels of competition
Innovative Products - characterized by short
product life cycles, volatile demand, high profit
margins, & relatively less competition
 Ethical and Sustainable Sourcing
Strategies (Continued)

Framework for ethical and sustainable

sourcing strategy development
Step 1 Establish corporate ethical and sustainable sourcing
strategies
Step 2 Train purchasing staff and implement policies
Step 3 Prioritize items based upon ethical and sustainability
opportunities and ease of implementation
Step 4 Develop performance measurement system
Step 5 Monitor progress and make improvements. Increase use
of green and fair trade products
Step 6 Expand focus to include other departments
 Ethical and Sustainable Sourcing
Strategies (Continued)

Ethical and Sustainable Framework

Step 1: Step 3:
Step 2: Train and
Establish Prioritize
implement
policies opportunities

Step 4: Develop Step 5: Monitor

Step 6: Expand
performance progress and
focus to other
measurement make
departments
systems improvements
 Supply Base Rationalization
Programs
Supply base rationalization (AKA supply base
reduction or supply base optimization) is often
the initial supply chain management effort

Buyer-supplier partnerships are easier with a

rationalized supply base & result in
Reduced purchase prices
Fewer supplier management problems
Closer & more frequent interaction between buyer &
supplier
Greater levels of quality & delivery reliability
 Ethical and Sustainable Supplier
Certification Programs
Supplier certification programs are used to
identify strategic supplier alliance candidates

Firms use in-house formal certification programs,

& most require ISO 9000 / 14000 or similar
certifications as part of the certification process

Buyers can monitor quality assurance methods &

specify the type of acceptance sampling &
statistical process control methods used
 Outsourcing Products and
Services
Outsourcing allows a firm to
Concentrate on core capabilities
Reduce staffing levels
Accelerate reengineering efforts
Reduce management problems
Improve manufacturing flexibility.

Risks associated with outsourcing, include

Loss of control
Production decisions & intellectual property
Increased reliance on suppliers
Increased need for supplier management
 Outsourcing Products and
Services (Continued)

In-sourcing (backsourcing)
Reverting to in-house production when quality, delivery,
and services do not meet expectations

Co-sourcing (selective sourcing)

The sharing of a process or function between internal
staff and an external provider & provides flexibility to
decide what areas to outsource, when, and for how
long.
 Early Supplier Involvement

Early supplier involvement (ESI) highly effective

supply chain integrative techniques
- Key suppliers become more involved in the internal
operations of the firm, particularly with respect to
new product & process design, concurrent
engineering & design for manufacturability
techniques
Value engineering activities help the firm to reduce
cost, improve quality & reduce new product development
time
 Early Supplier Involvement (Continued)

Vendor managed inventory (VMI)

Suppliers manage buyer inventories to reduce inventory
carrying costs & avoid stockouts for buyer

From the buyer-firms perspective

Supplier tracks inventories
Determines delivery schedules and order quantities
Buyer can take ownership at stocking location
From the suppliers perspective
Avoids ill-advised customer orders
Supplier decides inventory set up & shipments
Opportunity for supplier to educate customers about other
products
 Early Supplier Involvement (Continued)

Electronic data interchange (EDI)

Allows a supplier to profile demand & determine accurate
forecasts
EDI also provides reorder point data to permit timely
deliveries
Supplier co-location or JIT II
Suppliers employee is embedded in buyers purchasing
department to forecast demand, monitor inventory & place
orders with access to sensitive files & records
 Strategic Alliance Development

Alliance development, an extension of supplier

development refers to increasing a key or
strategic suppliers capabilities.
Supplier alliances result in better market
penetration access to new technologies &
knowledge, & higher return on investment
Alliance development eventually extends to a
firms second-tier suppliers, as the firms key
suppliers begin to form their own alliances.
 Negotiating Win-Win Strategic
Alliance Agreements
Collaborative negotiations (aka integrative
negotiations)
Both sides work together to maximize the outcome
or create a win-win result
Requires open discussions and a free-flow of
information between parties

Distributive negotiations
Refers to a process that leads to self-interested,
one-sided outcome
 Negotiating Win-Win Strategic
Alliance Agreements (Continued)

Steps Description

Gain an understanding of both parties interests;

1. Build preparation
brainstorm value-maximizing solutions; identify objective
process
criteria to evaluate fairness of agreement.

2. Develop Review previous negotiations to catalogue standards,

negotiation practices, precedents, metrics, creative solutions used,
database and lessons learned.

3. Design Create an environment to work together to create a

negotiation shared vocabulary, build working relationships, and map
launch process out a shared decision-making process.

4. Institute feedback Create process to provide feedback to negotiating teams

mechanism and capture lessons learned.

(Table 4.4)
 Use of e-Procurement Systems

Primary benefits of e-procurement include

Cost savings
Frees-up time to concentrate on core business
e-procurement systems
Concentrate large volumes of small purchases with
a few suppliers, using e- catalogues, available to
the organizations users.
Reverse auctions
Pre-qualified suppliers enter Web site & at pre-
designated time & date, try to underbid competitors,
monitoring bid prices until the session is over.
 Rewarding Supplier Performance

Rewarding suppliers provides an incentive to surpass

performance goals

Punishment is a negative reward, may be to reduce

future business; or a bill-back amount equal to the
incremental costs resulting from a late delivery or poor
quality

Strategic supplier agreements can reward

suppliers by allowing
A share of the cost reductions
More business and/or longer contracts
Access to in-house training seminars & other resources
Company & public recognition
 Benchmarking Successful
Sourcing Practices
Benchmarking
Measuring what other businesses do best and
matching their performance is an effective approach
to improving supply chain performance.
Benchmarking data regarding sourcing practices can
be obtained in any number of ways, both formal &
informal.
Resources for learning about & implementing
sourcing practices
The Center for Advanced Purchasing Studies.
Supply-Chain Council.
 Using Third-Party Supply Chain
Management Services
Third-party logistics (3PL)
A growing industry that involves managing a
firms sourcing or materials &/or product distribution
responsibilities
3PL providers charge a fee for services for an estimated
savings of 10 to 20% of total logistics costs; benefits
include improved service, quality, & profits for their
clients.

Vendor-managed inventory (VMI) services

One of the more popular roles of 3PL.
Lead logistics provider (LLP), aka 4PL
A primary 3PL provider; one that oversees other
3PLs
 Assessing & Improving the Firms
Purchasing Function
The purchasing function is one of the most
value-enhancing functions in any organization
It is preferable to periodically monitor the
purchasing functions performance against set
standards, goals, and/or industry benchmarks.

Surveys or audits can be administered as self-

assessments among purchasing staff as part of the
annual evaluation process.
 Assessing & Improving Firms
Purchasing Function (Continued)

Skill set requirements of purchasing professionals

have been changing. Purchasing personnel must today
exhibit world-class skills such as

1. Interpersonal 6. Customer focus

communication 7. Ability to manage
2. Ability to make change
decisions 8. Influencing &
3. Ability to work in persuasion skills
teams 9. Strategic skills
4. Analytical skills 10. Understanding
5. Negotiation skills business conditions
 Assessing & Improving Firms
Purchasing Function (Continued)

Assessment criteria include

1. Participating in and 6. Further supplier

leading integration
multifunctional teams 7. Contribute to new
2. Participate in value product development
engineering efforts 8. Improve time to
3. Optimize supply market
base 9. Initiate supplier cost
4. Create ESI initiatives reduction programs
5. Utilize e-procurement 10. Creation of strategic
alliances