SOURCING DECISIONS

IN A SUPPLY CHAIN
THE ROLE OF SOURCING IN A SUPPLY CHAIN
⮚ Sourcing is the set of business processes that required to purchase good and service.
⮚ Sourcing processes include:
- procurement
- supplier scoring and assessment
- design collaboration
- supplier scoring and assessment
- sourcing planning and analysis

⮚ Benefits of Effective Sourcing Decision

1. Can achieve a lower purchase price
2. Allow for the sharing of risk
3. Facilitate coordination with suppliers
4. Easier to manufacture and distribute
5. Significantly reduce the cost
6. Achieve better economies

SUPPLIER SCORING AND ASSESSMENT

⮚ Supplier performance should be compare on the basis of the supplier’s impact on total cost
⮚ There are several factors besides purchase price:
a. on-time performance
b. supply quality
c. pricing terms
d. delivery frequency
e. design collaboration capability
 OUTSOURCE

❑ Performing the function in-house is

preferable if the growth in surplus is
small or the increase in risk is large.
❑ A firm should consider outsourcing if the
growth in surplus is large with a small
increase the risk.

IN-HOUSE
 THE MECHANISMS THIRD PARTIES CAN USE TO GROW THE SURPLUS

Capacity aggregation Inventory aggregation Warehousing aggregation

Increase the supply chain
surplus by aggregating
demand wth multiple firms
and gaining production
economies of scale
Increase the supply
chain surplus by
aggregating inventories
across a large number of
customers
Needs over several
customers to increase the
supply chain by aggregating
warehousing

Transportation aggregation by Transportation aggregation by

transportation intermediaries storage intermediaries
Increase the surplus by aggregating Stores inventory increase the
the transportation function to a higher surplus by aggregating inbound
level than any shipper and outbound transportation
 Procurement aggregation Information aggregation
The aggregates procurement By a higher level than can be
for many small players and achieved by a firm performing
facilities economies of scale in the function in-house. All
production and inbound retailers aggregate on products
transportation from many manufactures
C Lower cost and higher quality
To increase the supply chain
O surplus, a third party need to
N provides lower cost or higher
quality relative to the firm
T
Receivables aggregation Relationship aggregation
It success if a third party can An intermediary can increase
aggregate the receivables risk the supply chain surplus by
to a higher level than the firm decreasing the number of
or it has a lower collection cost relationship required between
than the firm buyers and sellers

Ineffective contracts: Contracts with
performance metrics that distort the third
party’s incentives often significantly
reduce any grains from outsourcing.
06
Leakage of sensitive data & RISK OF USING A
information: Third party THIRD PARTY
always use the information and
intellectual property to serves
competitors. 05
Loss of internal capability & growth in third
party power: A firm may choose to keep a supply
function in-house if outssourcing show
signifanctly increase the third party power.
The process is broken : Using the third party
make be lost control of the process especially
into a broken supply chain process. The firm
should do the cost benefit analysis and decide on
01 outsourcing.
02 Underestimation of the cost of
coordination: Underestimate
the effort required to coordinate
activities across multiple entities
performing the task.
03
Reduced customer or supplier contact:
04
Sometimes, using the third party may lose
customer or supplier contact because not
all the customer or supplier prefer to make
a deal with thir party.
Supplier selection – Auctions and negotiations.

❖ It can be performed by competitive bids, reverse auctions and

direct negotiations.
❖ It based on the total cost of using a supplier
❖ There have several auctions which is :-
▪ Sealed-bid first-price auctions
▪ English auctions
▪ Dutch auctions
▪ Second-price (Vickery) auctions
 Contracts for Product Availability and Supply Chain Profits
• It involves of two parties in supply chain.

• The supplier can increase supply chain profits by offering a volume discount.

• The retailer will pays a lower price if the total quantity purchased exceeds a
threshold.

• In contracts, the supplier can specifies a fixed price and the buyer decides.

• For suboptimal is the most common in the supply chain performance. It called
double marginalization

• If demand is less than inventory, the inventory need to liquidate unsold

product at a discount.
 Buyback Contracts
- It contracts that allows
retailer to return unsold
inventory on a specific
amount and agreed price

Revenue Sharing Contracts Quantity Flexibility

- The buyers will pays a Contracts
minimal amount for each - It allows all the buyer to
Types of contracts
unit that purchased from modify product by limits
product availability and
supplier . But shares supply chain profits as demand is visibility
revenue for each unit that increases close to the
sold point.
 CONTRACTS TO 1. Differences in costs which is buyer and supplier lead
COORDINATE SUPPLY to decision that increase total supply chain.
CHAIN COSTS 2. Quantity discounts lead to information distortion
because order batching

1. Many instances in supply chain. CONTRACTS TO

2. Agent can acts on the behalf principal and agent’s INCREASE AGENT
action affect EFFORT
3. In threshold contracts, it can increase information
distortion and the best implemented on rolling horizon.

CONTRACTS TO 1. A buyer want performance improvement from

INDUCE supplier.
PERFORMANCE 2. Shared savings contracts that provide supplier with
IMPROVEMENT fraction savings that come from performance
improvement.
DESIGN COLLABORATION

▪ 50 - 70 per cent of spending at a manufacturer is through

procurement.

▪ 80 per cent of the cost of a purchased part is fixed in the design

phase.

▪ Design collaboration with suppliers can result in reduced cost,

improved quality, and decreased time to market.

▪ Important to employ design for logistics, design for

manufacturability.
▪ Manufacturers must become effective design coordinators
throughout the supply chain..
THE PROCUREMENT PROCESS
- The process which the supplier send the products to order placed by
the buyer.
- The objective is to enable the orders to be placed and delivered on
schedule at the lowest cost.
- Two main categories of purchased goods:
1. direct materials
= focus on improving coordination and visibility with supplier
2. indirect materials
= focus on decreasing the transaction cost for each order

- Procurement for both should consolidate the orders were possible to

take the advantages of economics
SOURCING PLANNING AND ANALYSIS

The aggregation of spending across

Procurement spending
and within categories and suppliers

Relates to supplier performance

MAKING SOURCING DECISION IN PRACTICE

Ensure appropriate
Use multifunction teams coordination across
regions and business units

Build long-term
Always evaluate the total
relationship with key
cost of ownership
supplies