PURCHASING & SUPPLY CHAIN MANAGEMENT, 4ePURCHASING & SUPPLY CHAIN MANAGEMENT, 4e
CENGAGE LEARNINGCENGAGE LEARNINGMonczka – Handfield – Giunipero – PattersonMonczka – Handfield – Giunipero – Patterson
Supply Management and Supply Management and Commodity Strategy Commodity Strategy
DevelopmentDevelopmentChapter 6Chapter 6
Chapter Overview
Aligning supply management and Aligning supply management and enterprise objectivesenterprise objectives
What is a category strategy?What is a category strategy? Category strategy developmentCategory strategy development Types of supply management Types of supply management
strategiesstrategies E-reverse auctionsE-reverse auctions Evolving sourcing strategiesEvolving sourcing strategies
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Aligning Objectives
What markets will the firm compete in, What markets will the firm compete in, and on what basis?and on what basis?
What are the long-term and short-term What are the long-term and short-term business goals?business goals?
What are the budgetary and economic What are the budgetary and economic resource constraints, and how will resource constraints, and how will these be allocated to functional groups these be allocated to functional groups and business units?and business units?
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How Companies Make Money
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Raise prices
Increase volume
Reduce cost of employees
Reduce cost of processes/waste
Reduce cost of goods/services
1. Increase revenues
2. Decrease costs
Integrative Strategy Development
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Integrative Strategy Development
Corporate strategyCorporate strategy Definition of businesses in which to Definition of businesses in which to
participateparticipate Acquisition and allocation of resources to Acquisition and allocation of resources to
those businessesthose businesses
Business unit strategyBusiness unit strategy Scope or boundaries of those businessesScope or boundaries of those businesses Basis of competitive advantageBasis of competitive advantage
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Integrative Strategy Development
Supply management strategySupply management strategy Support the desired competitive business-Support the desired competitive business-
level strategieslevel strategies How to complement other functional areasHow to complement other functional areas
Commodity strategyCommodity strategy How to purchase commodities to support How to purchase commodities to support
higher-level strategieshigher-level strategies
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Components of Integrative Strategy
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Translating Objectives Goals
Cost reduction objectives Cost reduction objectives goals goals Be low-cost producer in industryBe low-cost producer in industry
Reduce material costs by 15%Reduce material costs by 15% Reduce levels of inventory required to Reduce levels of inventory required to
supply internal customerssupply internal customers Reduce raw material inventory ≥ 20 Reduce raw material inventory ≥ 20
days’ supplydays’ supply
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Translating Objectives Goals
Technology/new product development Technology/new product development objectives objectives goals goals Outsource non-core competency activitiesOutsource non-core competency activities
Qualify 2 new suppliers by end of yearQualify 2 new suppliers by end of year Reduce product development timeReduce product development time
Develop a formal supplier integration Develop a formal supplier integration process manual by 12/31process manual by 12/31
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Translating Objectives Goals
Supply base reduction objectives Supply base reduction objectives goalsgoals Reduce the number of suppliers usedReduce the number of suppliers used
Reduce the supply base by 30% in next Reduce the supply base by 30% in next 6 months6 months
Joint problem solving with remaining Joint problem solving with remaining supplierssuppliers Identify $300,000 in cost savings with 2 Identify $300,000 in cost savings with 2
suppliers by end of fiscal yearsuppliers by end of fiscal yearPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e
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Translating Objectives Goals
Supply assurance objectives Supply assurance objectives goals goals Assure uninterrupted supply from Assure uninterrupted supply from
identified suppliersidentified suppliers Reduce order cycle time on key parts ≥ 1 Reduce order cycle time on key parts ≥ 1
weekweek
Quality objectives Quality objectives goals goals Increase quality of services and productsIncrease quality of services and products
Reduce average defects by 200 ppm on Reduce average defects by 200 ppm on all receipts in next fiscal yearall receipts in next fiscal year
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Enabling Effective Category Strategies
Spend money on resources initially, Spend money on resources initially, including assessment of current spend, including assessment of current spend, data collection, market research, data collection, market research, training, and peopletraining, and people
Validate savings or contribution to Validate savings or contribution to other company objectives achieved by other company objectives achieved by supply management and drive them to supply management and drive them to bottom linebottom line
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Enabling Effective Category Strategies
Sustain the initiative through Sustain the initiative through presentations to senior executives who presentations to senior executives who support the move towards an support the move towards an integrated supply management integrated supply management function with other functional groups in function with other functional groups in the supply chainthe supply chain
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Conducting a Spend Analysis
What did the business spend its money What did the business spend its money on over the past year?on over the past year?
Did the business receive the right Did the business receive the right amount of products and services given amount of products and services given what was paid for them? (S/OX issue)what was paid for them? (S/OX issue)
What suppliers received the majority of What suppliers received the majority of the business?the business?
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Conducting a Spend Analysis
Did the suppliers charge an accurate Did the suppliers charge an accurate price across all divisions vs. P.O. price across all divisions vs. P.O. requirements, contracts, and SOWs?requirements, contracts, and SOWs?
Which divisions spent their money on Which divisions spent their money on products and services that were products and services that were correctly budgeted for?correctly budgeted for?
Are there opportunities to combine Are there opportunities to combine volumes and standardize purchases?volumes and standardize purchases?
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Procurement KPIs Example
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%%
Spend Analysis Spreadsheet
Sort by commoditySort by commodity Find total spend by commodityFind total spend by commodity Chart top 10 in descending $ amountChart top 10 in descending $ amount Sort by number of suppliers/commoditySort by number of suppliers/commodity Chart top 10 by descending # of Chart top 10 by descending # of
supplierssuppliers Find average spend/supplier/commodityFind average spend/supplier/commodity Apply Pareto analysis for opportunitiesApply Pareto analysis for opportunities
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Sample Spend CategoriesSupplier Commodity Annual Spend
Rebate Company Rebate fulfillment & call center $329,873,663
Invest Company Investments $130,328,512
Advert Company Advertising $56,134,490
Repair Company Service repairs $49,339,218
Benefits Company Benefits $48,969,149
Hardware Company Hardware $40,572,450
Partco Service parts $39,910,372
Telecom Telecommunications $31,055,599
Display Company Store displays $30,020.969
Penpaper Company Paper $29,175,843
Labor Company Contract labor $27,880,363
Supply Company Paper $23,844,707
Contract Company General contracting $22,579,113
Office Company Paper $22,257,690
Graphics Company Graphic design $21,966,989
Payment Company Business & management services $20,380,275
Freight Company Surface freight $19,369,010
Paper Company Paper $15,603,682
Service Plan Company Service plan $15,478,827
Service Company Service parts $14,868,023
Consumer Company Consumer financing $14,833,333
Energy Company Energy $14,087,177
Spend by Commodity
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Mil
lio
n $
Mil
lio
n $
Suppliers by Commodity
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Spend/Supplier by Commodity
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Percent of Total Spend
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The Strategic Sourcing Process
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Goal:Develop a
statement of work and plan
Goal:Understand the supply market
Goal:Classify suppliers
and define sourcing approach
Goal:Goal:Negotiate a win-win Negotiate a win-win
contractcontract
Goal:Goal:Continuously Continuously
improve improve performanceperformance
Inputs and Tools: Project leader;
other team members
Inputs and Tools: Interviews; online
research; conferences
Inputs and Tools: Market research; portfolio matrix;
forecasted spend
Inputs and Tools: Inputs and Tools: Negotiation plan; Negotiation plan;
supplier evaluation supplier evaluation tooltool
Inputs and Tools:Inputs and Tools:Contract; supplier Contract; supplier
scorecardscorecard
Outputs:Baseline data; project charter;
work plan
Outputs:Report on supply trends; changes; pricing; capacity;
etc.
Outputs:Supplier evaluation
tool with desired relationship
Outputs:Outputs:Signed contractSigned contract
Outputs:Outputs:Supplier Supplier
development plan; development plan; communicationcommunication
Step 1: Team and Project Charter
Identify key cross-functional team Identify key cross-functional team membersmembers
Define the scope of the category Define the scope of the category strategystrategy
Publish a team charterPublish a team charter Develop a work plan and Develop a work plan and
communication plancommunication plan
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Step 2: Conduct Market Research
Understand the purchase requirement Understand the purchase requirement relative to business unit objectivesrelative to business unit objectives
Conduct thorough spend analysisConduct thorough spend analysis Identify specific internal usersIdentify specific internal users Identify current suppliersIdentify current suppliers Research supply marketplaceResearch supply marketplace
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Step 2: Conduct Market Research
Information requiredInformation required Total annual purchasesTotal annual purchases Interviews with stakeholdersInterviews with stakeholders External market researchExternal market research
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Key suppliersKey suppliers Available capacityAvailable capacity Technology Technology trendstrends
Price data and Price data and trendstrends
Cost data and Cost data and trendstrends
Technical Technical requirementsrequirements
Environmental Environmental issuesissues Regulatory issuesRegulatory issues Other available Other available
datadata
Step 2: Conduct Market Research
Triangulation – explore, compare, and Triangulation – explore, compare, and contrast data from multiple sourcescontrast data from multiple sources
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Trade Trade journalsjournals
Annual Annual reportsreports InternetInternet BooksBooks
Snow-ball Snow-ball samplingsampling
Trade Trade consultantsconsultants
Category Category managersmanagers HeadlinesHeadlines
SuppliersSuppliers Investment Investment reportsreports
Step 2: Conduct Market Research
Porter’s Five Forces ModelPorter’s Five Forces Model SWOT analysisSWOT analysis Establish benchmarks through industry Establish benchmarks through industry
databasesdatabases Requests for informationRequests for information Value chain analysisValue chain analysis Supplier researchSupplier research
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Porter’s Five Forces Model
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Market Internal Competition
Threat of New Entrants
Pressure from Substitutes
Supplier Bargaining
Power
Buyer Bargaining Power
Source:Source:Competitive StrategyCompetitive StrategyMichael E. Porter (1980)Michael E. Porter (1980)
Other possible forces:Other possible forces:•GlobalizationGlobalization•DigitizationDigitization•DeregulationDeregulation
Market Internal Competition
Speed of industry growthSpeed of industry growth Capacity utilizationCapacity utilization Exit barriersExit barriers Product differencesProduct differences Switching costsSwitching costs Diversity of suppliersDiversity of suppliers
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Threat of New Entrants
Capital marketsCapital markets Availability of skilled workersAvailability of skilled workers Access to critical technologies, inputs, Access to critical technologies, inputs,
or distributionor distribution Product life cyclesProduct life cycles
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Threat of New Entrants
Brand equity and customer loyaltyBrand equity and customer loyalty Government deregulationGovernment deregulation Risk of switchingRisk of switching Economies of scaleEconomies of scale
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Pressure from Substitutes
Relative performance of substitute Relative performance of substitute products and servicesproducts and services
Relative priceRelative price Switching costsSwitching costs Buyer’s propensity to switchBuyer’s propensity to switch
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Buyer Bargaining Power
Buyer concentrationBuyer concentration Buyer volumeBuyer volume Buyer switching costsBuyer switching costs Price sensitivityPrice sensitivity Product differencesProduct differences
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Buyer Bargaining Power
Brand identityBrand identity Impact on quality or performanceImpact on quality or performance Buyer profitsBuyer profits Availability of substituttesAvailability of substituttes
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Supplier Bargaining Power
Price of major inputsPrice of major inputs Ability to pass along price increasesAbility to pass along price increases Availability of key technologies or other Availability of key technologies or other
resourcesresources Threat of forward or backward integrationThreat of forward or backward integration Industry capacity utilizationIndustry capacity utilization Supplier concentrationSupplier concentration Importance of volume to supplierImportance of volume to supplier
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SWOT Analysis
Strengths Weaknesses
OpportunitiesOpportunities Threats
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Internal Factors
External Factors
• Broad customer base
• Established product range
• Established distribution channels
• Emergence of other uses and markets
• Emerging overseas markets
• High entry barriers
• Low product innovation
• Traditional, unionized business processes
• Low patent protection
• Emerging Emerging overseas overseas supplierssuppliers
• NPD costs are NPD costs are highhigh
• Environmental Environmental regulationsregulations
Benchmarks
Identify critical performance criteriaIdentify critical performance criteria Identify relative competitive Identify relative competitive
performanceperformance Use of industry benchmarksUse of industry benchmarks
CAPSCAPS Third party consulting firmsThird party consulting firms
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Requests for Information (RFIs)
Use before a specific requisition is Use before a specific requisition is issuedissued
Use to obtain general information about Use to obtain general information about services, products, or suppliersservices, products, or suppliers Does not constitute a binding documentDoes not constitute a binding document
Use when a large or complicated Use when a large or complicated purchase is considered and when pool purchase is considered and when pool of suppliers must be prequalifiedof suppliers must be prequalified
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Supplier Research
Cost structureCost structure Financial statusFinancial status Customer Customer
satisfaction levelssatisfaction levels Support capabilitiesSupport capabilities Relative strengths Relative strengths
and weaknessesand weaknesses Buyer’s fit with Buyer’s fit with
suppliersupplier
How the company is How the company is viewedviewed
Core capabilitiesCore capabilities Strategy/future Strategy/future
directiondirection CultureCulture
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Step 3: Strategy Development
Portfolio analysisPortfolio analysis Critical commodity – strategic supplierCritical commodity – strategic supplier Routine commodityRoutine commodity Leverage commodity – preferred supplierLeverage commodity – preferred supplier Bottleneck commodity – transactional Bottleneck commodity – transactional
suppliersupplier
Process and design capabilitiesProcess and design capabilities Management capabilityManagement capability
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Step 3: Strategy Development
Financial condition and cost structureFinancial condition and cost structure Planning and control systemsPlanning and control systems Environmental regulation complianceEnvironmental regulation compliance Longer-term relationship potentialLonger-term relationship potential Weighted point supplier evaluation Weighted point supplier evaluation
systemssystems
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Portfolio Analysis
Bottleneck Commodity
Critical Commodity
Routine Commodity
Leverage Commodity
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Co
mp
lexi
ty o
r C
om
ple
xity
or
Ris
k Im
pac
tR
isk
Imp
act
Value PotentialValue Potential
LowLowLowLow
HighHigh
HighHigh
Critical Commodity
Critical to profitability and operationsCritical to profitability and operations Few qualified sources of supplyFew qualified sources of supply Large expendituresLarge expenditures Design and quality are criticalDesign and quality are critical Complex and/or rigid specificationsComplex and/or rigid specifications
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Critical Commodity
StrategyStrategy Form partnership with suppliersForm partnership with suppliers
TacticsTactics Increase role of selected supplierIncrease role of selected supplier
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Critical Commodity
ActionsActions Heavy negotiationHeavy negotiation Supplier process managementSupplier process management Prepare contingency plansPrepare contingency plans Analyze market and competitionAnalyze market and competition Use functional specificationsUse functional specifications
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Routine Commodity
Many alternative products and servicesMany alternative products and services Many sources of supplyMany sources of supply Low value, small individual Low value, small individual
transactionstransactions Everyday use, unspecified itemsEveryday use, unspecified items Anyone could buy itAnyone could buy it
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Routine Commodity
StrategyStrategy Simplify acquisition processSimplify acquisition process
TacticsTactics Increase role of systemsIncrease role of systems Reduce buying effortReduce buying effort
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Routine Commodity
ActionsActions Rationalize supply baseRationalize supply base Automate requisitioning, e.g., EDI, credit Automate requisitioning, e.g., EDI, credit
cardscards Stockless procurementStockless procurement Minimize administrative costsMinimize administrative costs Little negotiationsLittle negotiations
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Leverage Commodity
High expendituresHigh expenditures Large marketplace capacity with ample Large marketplace capacity with ample
inventoriesinventories Many alternate products and servicesMany alternate products and services Many qualified sources of supplyMany qualified sources of supply Market / price sensitiveMarket / price sensitive
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Leverage Commodity
StrategyStrategy Maximize commercial advantageMaximize commercial advantage
TacticsTactics Concentrate businessConcentrate business Maintain competitionMaintain competition
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Leverage Commodity
ActionsActions Promote competitive biddingPromote competitive bidding Exploit market cycles / trendsExploit market cycles / trends Procurement coordinationProcurement coordination Use industry standardsUse industry standards Active sourcingActive sourcing
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Bottleneck Commodity
Complex specifications requiring Complex specifications requiring complex manufacturing or service complex manufacturing or service processprocess
Few alternate productions / sources of Few alternate productions / sources of supplysupply
Big impact on operations / maintenanceBig impact on operations / maintenance New technology or unleaded processesNew technology or unleaded processes
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Bottleneck Commodity
StrategyStrategy Ensure supply continuityEnsure supply continuity
TacticsTactics Decrease uniqueness of suppliersDecrease uniqueness of suppliers Manage supplyManage supply
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Bottleneck Commodity
ActionsActions Widen specificationsWiden specifications Increase competitionIncrease competition Develop new suppliersDevelop new suppliers Medium-term contractsMedium-term contracts Attempt competitive biddingAttempt competitive bidding
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Step 4: Contract Negotiation
Establishing and tasks and time linesEstablishing and tasks and time lines Assigning accountabilities and process Assigning accountabilities and process
ownershipownership Ensuring adequate resources are made Ensuring adequate resources are made
availabilityavailability Strategy communicated to all Strategy communicated to all
stakeholdersstakeholders Price analysisPrice analysis
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Step 4: Contract Negotiation
Preferred supplier listsPreferred supplier lists Competitive biddingCompetitive bidding NegotiationNegotiation
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Price Analysis
Defined marketplaceDefined marketplace Best priceBest price Average priceAverage price Business unit’s priceBusiness unit’s price Expected trends in pricingExpected trends in pricing
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Effective Competitive Bidding
Buying firm can provide qualified Buying firm can provide qualified suppliers with clear descriptions of the suppliers with clear descriptions of the items or services to be purchaseditems or services to be purchased
Volume is high enough to justify the Volume is high enough to justify the cost and effortcost and effort
Buying firm does not have a preferred Buying firm does not have a preferred suppliersupplier
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Effective Negotiation
Item is new or technically complex item Item is new or technically complex item with only vague specificationswith only vague specifications
Purchase requires agreement about a Purchase requires agreement about a wide range of performance factorswide range of performance factors
Buyer requires supplier to participate in Buyer requires supplier to participate in the development effortthe development effort
Supplier cannot determine risks and Supplier cannot determine risks and costs without buyer’s inputcosts without buyer’s input
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Step 5: SRM
Continuous monitoring of both the Continuous monitoring of both the strategy and the supplierstrategy and the supplier
Continuous monitoring of the Continuous monitoring of the supplier’s performance on key goals supplier’s performance on key goals and objectivesand objectives
Supplier scorecardSupplier scorecard Use quarterly and review results with Use quarterly and review results with
suppliersupplier
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Elements of the Monitoring Process
Regular review meetings to ensure that Regular review meetings to ensure that the strategy is still congruent with the strategy is still congruent with organizational objectivesorganizational objectives
Share results with top managementShare results with top management Assess internal customer and supplier Assess internal customer and supplier
perceptionsperceptions Determine if key goals have been Determine if key goals have been
achievedachieved Provide feedbackProvide feedback
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Types of Strategies
Supply base optimizationSupply base optimization Supply risk managementSupply risk management Global sourcingGlobal sourcing Longer-term supplier relationshipsLonger-term supplier relationships Early supplier design involvementEarly supplier design involvement Supplier developmentSupplier development Total cost of ownershipTotal cost of ownership
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Facilitating E-Reverse Auctions
Buyers and suppliers able to Buyers and suppliers able to communicate in real-time, worldwide, communicate in real-time, worldwide, via the Internetvia the Internet
Development of robust, user-friendly, Development of robust, user-friendly, third-party auction systemsthird-party auction systems
Significant improvements in goods and Significant improvements in goods and service quality and cycle time reductionservice quality and cycle time reduction
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Evolving Sourcing Strategies
Basic Beginnings
Moderate Development
Limited Integration
Fully Integrated Supply Chains
• Quality/cost teams
• Longer-term contracts
• Volume leveraging
• Supply base consolidation
• Supplier quality focus
• E-RAs• Ad hoc supplier
alliances• Cross-functional
sourcing teams• Supply base
optimization• International
sourcing• Cross-location
sourcing teams
• Global sourcing• Strategic
supplier alliances
• Supplier TQM development
• Total cost of ownership
• Nontraditional purchase focus
• Parts/service standardization
• Early supplier involvement
• Dock-to-stock pull systems
• Global supply chains with external customer focus
• Cross-enterprise decision making
• Full-service suppliers
• Early sourcing• Insourcing/
outsourcing to maximize core competencies of firms throughout the supply chain
• E-systems
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Phase 1: Basic Beginnings
Supply management characterized as a Supply management characterized as a lower-level support functionlower-level support function
Short-term approachesShort-term approaches ReactionaryReactionary Impetus for change is driven by Impetus for change is driven by
managementmanagement Ensure adequate capacityEnsure adequate capacity
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Phase 1: Basic Beginnings
Adversarial supplier relationshipsAdversarial supplier relationships Limited resources for improvementLimited resources for improvement Mid-level reportingMid-level reporting Efficiency-related performance Efficiency-related performance
measuresmeasures Focus on price reductionFocus on price reduction Transaction-based information systemsTransaction-based information systems
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Phase 2: Moderate Development
Centralization of supply management Centralization of supply management functionfunction
Commodity managementCommodity management Company-wide databasesCompany-wide databases Company-wide agreementsCompany-wide agreements Single sourcing with long-term Single sourcing with long-term
agreementsagreements
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Phase 2: Moderate Development
Limited cross-functional integrationLimited cross-functional integration Recognition of strategic supplier Recognition of strategic supplier
relationshipsrelationships Evaluated on achievement of Evaluated on achievement of
competitive objectivescompetitive objectives Supplier viewed as a resourceSupplier viewed as a resource Informal internal integrationInformal internal integration
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Phase 3: Limited Integration
Concurrent engineeringConcurrent engineering Supplier developmentSupplier development Lead time reductionLead time reduction Early supplier involvementEarly supplier involvement Supply management strategies Supply management strategies
integrated early in product and process integrated early in product and process design activitiesdesign activities
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Phase 3: Limited Integration
Evaluated on strategic contributionEvaluated on strategic contribution Extensive functional integrationExtensive functional integration Focus on building competitive Focus on building competitive
advantageadvantage Strong external customer focusStrong external customer focus Global databasesGlobal databases Total cost modelingTotal cost modeling
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Phase 4: Full Integration
Assumed a strategic orientationAssumed a strategic orientation Automated non-value-adding activitiesAutomated non-value-adding activities Greater focus on strategic objectives Greater focus on strategic objectives
and activitiesand activities Developing global supplier capabilitiesDeveloping global supplier capabilities Systems thinking approach over entire Systems thinking approach over entire
supply chainsupply chain
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Observations on Strategic Sourcing
Few organizations have fully executed Few organizations have fully executed complex Phase 3 and Phase 4 complex Phase 3 and Phase 4 strategiesstrategies Relative complexityRelative complexity Inadequate resources and commitmentInadequate resources and commitment Lack of supply base optimizationLack of supply base optimization Personnel requiring higher level skillsPersonnel requiring higher level skills
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