GLOBAL SOURCING

AND PROCUREMENT

Chapter Sixteen
McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

LO161: Explain what strategic sourcing

is.
LO162: Explain why companies
outsource processes.
LO163: Analyze the total cost of
ownership.
LO164: Evaluate sourcing performance.

16-2

Supply Chain
how suppliers, manufacturers,
distributors, and customers are
linked together.

Adding Value through the

Chain

Supply Chain Management

Apply a total systems approach to
managing the entire flow of

information
materials
and services

Raw
material
suppliers

Factories &
warehouses

End
customer

Supply Chain Management

Goals
to reduce uncertainty and risk,
improving:
inventory levels
cycle time
processes
end-customer service levels

Strategic Sourcing
Strategic sourcing:
the development and
management of supplier
relationships to acquire goods and
services in a way that aids in
achieving the immediate needs of
the business

Measuring Sourcing
Performance

Inventory turnover: how often

inventory is replaced during the year

Cost of goods sold: the annual cost for a

company to produce the goods or services
provided to customers
Average aggregate inventory value:
the total value of all items held in inventory

Weeks of supply: how many weeks

worth of inventory is in the system at a
particular point in time

Calculations
Cost of goods sold
Inventory turnover
Average aggregate inventory value
Average aggregate inventory value
Weeks of supply
52
Cost of goods sold

Example

Cost of goods sold

Average aggregate inventory value
40,190

87.56 turns per year

228 231

Inventory turnover

Average aggregate inventory value

52
Cost of goods sold
228 231

52 0.59 week
40,190

Weeks of supply

Sourcing/Purchasing Design
Matrix

16-12

Strategic Sourcing

Continued

Sourcing activities can vary greatly and

depend on the item being purchased

Specificity: refers to how common the item

is and, in a relative sense, how many
substitutes might be available

Commonly available products can be purchased

using a relatively simple process

Strategic Sourcing
(continued)

Request for proposal (RFP): used for

purchasing items that are more complex or
expensive and where there may be a number of
potential vendors

Vendor-managed inventory: when a

customer actually allows the supplier to
manage an item or group of items for them

16-14

The Bullwhip Effect

Bullwhip effect: phenomenon of

variability magnification as we move
from the customer to the producer in the
supply chain

A slight change in consumer sales ripples

backward as magnified oscillations
upstream, like the result of a flick of a
bullwhip handle.

16-15

The Bullwhip Effect

Consumer
sales are
predictable
and steady.

Retailer orders start to

show variability as lot
sizes and other factors
have an impact.

Farther up the supply

chain variability
increases.

16-16

Bullwhip Effect

In many cases consumer demand

(sales) is much more stable than the
orders to:
- Wholesaler, Manufacturer,
Supplier
Possible solutions:
Continuous replenishment:
inventory is replaced frequently, as
part of an ongoing process (very
often is supervised by supplier vendor managed inventory)

Functional Products
Functional products include the staples
that people buy in a wide range of retail
outlets, such as grocery stores and gas
stations.
Lead time
Product Contributi
Only 10
life cycle
on
to 20
of more margin of
product
than two
5 to 20
variations
years
percent

An
average
forecast
error of
only 10
percent

for maketo-order
products
of from
six
months
to one
year

16-18

Innovative Products (fashion,

gadgets, etc.)
Innovation can enable a
company to achieve
higher profit margins.

Typically these products

have a life cycle of just a
few months.
Imitators quickly erode the
competitive advantage that
innovative products enjoy.
Companies are forced to
introduce a steady stream of
newer innovations.

Newness of the
innovative products
makes demand for them
unpredictable.

The short life cycles and

the great variety typical
of these products further
increase unpredictability.

16-19

Demand and Supply

Uncertainty

16-20

Uncertainty Framework
Demand Uncertainty
High (Innovative
Products)

Low
(Stable
Process)

Grocery, basic
apparel, food, oil, and
gas
Efficient supply
chain

Fashion apparel,
computers, popular
music
Responsive supply
chain

High
(Evolving
Process)

Hydroelectric power,
some food products
Risk-Hedging
supply chain

Telecom, High-end
computers,
semiconductor
Agile supply chain

Supply
Uncertai
nty

Low (Functional
Products)

16-21

Supply Chain Strategies

Efficient supply
chains utilize
strategies aimed at
creating the highest
cost efficiency.

Responsive supply
chains utilize
strategies aimed at
being responsive and
flexible

Strategy
Agile supply chains
Risk-hedging supply
utilize strategies aimed at
chains: utilize strategies
being responsive and
aimed at pooling and
flexible to customer
sharing resources in a
needs. Through pooling
supply chain to share
inventory and capacity
risk.
16-22

Outsourcing

Outsourcing: moving some of a firms

internal activities and decision
responsibility to outside providers
Allows a company to create a
competitive advantage while reducing
cost.
An entire function may be outsourced,
or some elements of an activity may be
outsourced, with the rest kept in-house.
16-23

Reasons to Outsource
Financial

Improve return on assets by reducing inventory and selling

unnecessary assets
Generate cash by selling low-return entities
Gain access to new markets, particularly in developing countries
Reduce costs through lower cost structure
Turn fixed costs into variable costs

Improveme
nt

Improve quality and productivity

Shorten cycle time
Obtain expertise, skills, and technologies that are otherwise
unavailable
Improve risk management
Improve credibility and image by associating with superior providers

Organizatio
nal

Improve effectiveness by focusing on what the firm does best

Increase flexibility to meet changing demand for products and
services
Increase product and service value by improving response to
customer needs
16-24

Structuring Supplier
Relationships

16-25

Green Sourcing

Being environmentally responsible has

become a business imperative.
Many firms are looking to their supply
chains to deliver green results.
Financial results can often be improved
through going green.
A comprehensive green sourcing effort
should assess how a company uses
items that are purchased internally.
It is also important to reduce waste.
16-26

Green Sourcing Process

16-27

Total Cost of Ownership

Total cost of ownership (TCO): an

estimate of the cost of an item that
includes all the costs related to the
procurement and use of an item,
including any related costs in disposing
of the item
Can be applied to internal costs or more
broadly to costs throughout the supply
chain

Total Cost of Ownership

Factors

Question Bowl
A typical supply chain would
include which of the following?
a. Suppliers
b. Manufacturers
c. Distribution
d. All of the above
e. None of the above

Answer: d. All of the above

Question Bowl

a.
b.
c.
d.
e.

The supply chain measure of

Inventory Turnover is which
of the following ratios?
Avg. inventory value/total costs
Costs of goods sold/Avg.
aggregate inventory value
Total costs of goods/Avg. costs
of goods
Weeks worth of inventory/No. of
weeks
None of the above

Answer: b. Costs of goods sold/Avg.

aggregate inventory value

Question Bowl
Which of the following are reasons
why an organization should use
outsourcing as a supply chain
strategy?
a. Reduces investment in assets
b. Turns fixed costs into variable
costs
c.
Concentrate on it does best
d. All of the above
Answer:
d. the
All of
the above
e.
None of
above