Description
It also explains different types of supplier contracts like buyback contracts, revenue sharing contracts, quantity flexibility contracts. It also explains the framework for make or buy decisions. It also explains what is 3PL and 4 PL.
Sourcing in Supply Chain
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Purchasing vs Sourcing
• Purchasing or procurement is the process by which companies acquire raw materials, components, products, services and other resources from suppliers to execute their operations. • Sourcing is the entire set of business processes required to purchase goods and services
Key Sourcing Related Processes
Supplier Selection and Supplier scoring Contract and Assessment Negotiation
Design Collaboration
Procurement
Sourcing Planning and Analysis
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Supplier Scoring and Assessment
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SUPPLIER SCORING AND ASSESSMENT:
• Supplier scoring and assessment is the process used to rate supplier performance • Traditionally, quoted price has been the only dimension that suppliers have been compared on. • This was a mistake as the Total cost of using a supplier may differ from the quoted
price. Lowest quoted price supplier may be highest on Total Cost. Some examples
are: ? If the supplier take a longer lead time, the company may have to keep higher inventory as against another who has a lower lead time. ? If the supplier has poor on-time deliver performance, then there could be loss of sales which should be added to the Total Cost.
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
• Replenishment lead time • On-time performance • Supply flexibility • Delivery frequency / minimum lot size
• Quality
• Inbound Transportation cost • Pricing terms • Information coordination capability • Design collaboration capability • Exchange rates, taxes and duties • Supplier viability
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Replenishment lead time: • As the replenishment lead time from a supplier grows, the amount of safety
inventory that need to be held by the buyer grows proportional to the square
root of the lead time.
On-time performance:
• On-time performance affects the variability of the lead time. • A reliable supplier has low variability of lead time where as an unreliable supplier has high variability. • Higher variability in lead time lead to: ? Increase in Safety stock ? Increase in loss of sales
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Supplier Flexibility: • Supply flexibility is the amount of variation in order quantity that a supplier can tolerate keeping other things constant.
• Greater the flexibility, lesser is cost due to forecast inaccuracy and lesser the total
cost Delivery Frequency / Minimum Lot size: • Higher the lot size higher is the safety stock and cycle inventory • It is desirable to have a supplier who can supply with minimum lot size
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Supply Quality: • Poor quality lead to increase in rejections. • Inventory holding increases while dealing with poor quality suppliers
• Quality also impacts customer satisfaction and product cost because of rework,
material loss and inspection cost. Inbound Transportation Cost: • Total cost includes the inbound transportation cost of bringing material in from the supplier. • Sourcing a product overseas may have lower product cost but may increase the inbound transportation cost. • Also, longer the distance, higher the lead time and inventory holding.
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Pricing Terms: • Pricing terms typically include credit period and discounts. • Higher credit period reduces the required working capital.
• Higher quantity discount reduces the direct cost but will increase the inventory
holding cost Information Coordination Capability:
• Good coordination will result in better replenishment planning, decreasing both
the inventory carried as well as lost sales. • Information capability reduce the transaction costs. • It improves visibility in the supply chain.
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Design Collaboration Capability: • Design collaboration capability is becoming increasingly important. • Large part of the product cost is fixed at design. Design collaboration capability for manufacturability and supply chain will reduce the overall cost Exchange Rates, Taxes and Duties: • Exchange rates, taxes and duties can be significant for a firm with a global manufacturing and supply base. • Currency fluctuations may impact component price more than all other factors put together. • Financial hedges can be used to counter exchange rate fluctuations. • Level of taxes and duties will have an impact on total cost.
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Supplier Viability: • Supplier should be in a sound financial health. • If the supplier supplying critical items go broke, it could shut down the whole operations of the company.
• Also, the supplier should have the capability to make investments to support the
company’s expansion plans.
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SUPPLIER PERFORMANCE FACTORS AND THEIR IMPACT ON TOTAL COST
Factors Purchase Price Inventory Transportation Cost Product Introduction Time
Replenishment Lead Time On-Time performance Supply Flexibility Delivery Frequency Quality Inbound Transportation Cost Pricing Terms Information Coordination Design Collaboration Exchange Rates and Taxes Supplier Viability
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X X X X X X X X X X X X X X X X X X
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Supplier Selection and Contracts
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SUPPLIER SELECTION AND CONTRACTS:
• Based on scores of different suppliers in the assessment, companies shortlist the suppliers. • Final selection are based on the total cost.
• Companies selects suppliers based on it’s policy of
? Single Sourcing or ? Multi Sourcing • Single Sourcing:
? Single sourcing guarantees the suppliers sufficient business and the suppliers would be
more forthcoming to make buyer-specific investments for the company. ? Buyer-specific investments can be in the form of plant or machinery or it could be in the form of certain specific skills.
? Single sourcing is predominantly used in auto industry and started by Japanese
companies.
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SUPPLIER SELECTION AND CONTRACTS:
• Single Sourcing: ? Single sourcing increases the risk and make the company too dependent on the supplier. • Multi Sourcing: ? Increases the transaction costs. ? Less readiness on the part of supplier to make major investments for the buyer. ? Reduces the dependency on the supplier. ? Increase competition between different suppliers which may reduce the direct cost.
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SUPPLIER SELECTION AND CONTRACTS:
• Structuring Contracts: ? Once the suppliers have been selected, contracts have to be structured between the buyer and each supplier.
? A supply contract specifies parameters governing the buyer-supplier
relationship. ? Contracts should be designed to facilitate desirable supply chain outcomes and minimize actions that hurt performance.
? The objective of a contract should be to:
? To improve availability and supply chain profits ? To discourage information distortion ? To get the best performance from the supplier
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SUPPLIER SELECTION AND CONTRACTS:
• Contracts for Product Availability and Supply Chain Profits: ? Many shortcomings in supply chain performance occur because the buyer and supplier are two different entities, each trying to optimize their own profits. ? Action taken by two parties in the supply chain thus results in profits that are lower than the what would have been if they had worked with a common objective. This is called as Double Marginalization. ? Examples of Double Marginalization: ? If the supplier has higher bargaining power, he may force the buyer to buy in large quantities with high lead time. There would be increase in inventory holding cost and expiry of inventory which would reduce the overall profit. ? If the buyer has higher bargaining power, he may force the supplier to supply in minimum lot size and shorter lead times. Supplier may have to keep higher amounts of inventory than normally required. Again this would reduce the overall profit.
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SUPPLIER SELECTION AND CONTRACTS:
• Three contracts that increase overall profits are:
? Buy-back of return contracts
? Revenue sharing contracts ? Quantity flexibility contracts
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BUYBACK CONTRACTS:
• A buyback or returns clause in a contract allows a retailer unsold inventory up
to a specified amount at an agreed upon price within a specified time.
• Buyback improves the product availability. • Inventory expiry costs is shared between manufacturer and the supplier. • Buyback contracts are most effective for products with low variable costs (Ex; music, books, newspapers, software etc)
• Instead of buying back, supplier may allow higher discounts to sell the product.
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DOWNSIDE OF BUYBACK CONTRACTS:
• Higher Inventory and Return Costs:
? Leads to over-ordering by manufacturers to improve product availability.
? Increase in return costs
• Less Sales Effort:
? If there is no buy-back, managers put all their effort to sell their product. ?With the buy-back, there may be a slackness in the effort. • Information distortion: ? Without a buy-back policy, manufacturer places order based on forecast or customer
order.
? With buy-back policy, managers tend to place larger than the actual requirement. ?In effect supplier will be producing against retailer’s order which may not be indicative of the actual demand
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REVENUE-SHARING CONTRACTS:
• In a revenue sharing contract, the buyer pays a minimal amount for each unit
purchased from the supplier but shares a fraction of the revenue from each unit sold.
• Revenue sharing contracts have a similar effect as buyback contracts in: ? improving product availability ? Lessening the sales effort ? Higher Inventory ? Information distortion • Unlike buyback, revenue sharing do not increase the cost of returns.
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QUANTITY FLEXIBILITY CONTRACTS:
• A quantity flexibility contract clause allows the buyer to modify the order (with certain
range) as demand visibility increase closer to the point.
• A typical example of quantity flexibility contract is: ? Manufacturer give 3 month rolling plan to the supplier. ? First month is firm where no change is quantity is allowed.
? Second month plan can be modified by + or – 10%
? Third month plan can be modified by + or – 20% • Supplier dispatches only the modified quantity • The amount ordered by the manufacturer will be more in line with actual demand
resulting in higher profits for the supply chain.
• Quantity flexibility contracts are preferred for products with high marginal cost or in instances where surplus capacity is available. • Quantity flexibility contracts leads to less information distortion.
• Downside of these contracts is they may lead to higher levels of long-term forecasting
inaccuracy
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CONTRACTS TO INCREASE AGENT EFFORT
• Two-part tariffs / threshold contracts can be used to counter double marginalization and
increase agent effort in supply chain.
• For example, consider 2 situation: ? A company pays a fixed amount as margin to the retailer irrespective of the quantities sold or
? A company pays a fixed amount but pays more if the quantity sold crosses a limited
threshold. (It pays 5% each for sale of 1000 units whose cost is Rs. 100 but pays 7% for anything sold above 1000 units) ? Generally, in the second case, the retailer will make more effort.
• This may also lead to increase in demand variability. For example, if the retailer knows
that there is a demand for 2000 in the next 2 months: ? If he sells 1000 pieces in each month, he will get he will get Rs. 5000 per month and a Total of Rs. 10,000 in 2 months.
? If he sells 500 pieces in the first month and 1500 in the second month, he will get Rs.
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2500 for first month sales, Rs. 8500 for the second month and a total of Rs. 11,000
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CONTRACTS TO INCREASE AGENT EFFORT
• To overcome the information distortion, company can: ? Go for rolling horizon. Ex. Retailer have to cross 1000 units for 3 consecutive months to get the quantity incentive ? Penalize the under performance while incentivising the higher performance. Ex. Retailer will get ? 5% if he sells 900 to 1000 units a month, ? 3% if he sells less than 900 units a month ? 7% if he sells more than 1000 units a month
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CONTRACTS TO INDUCE PERFORMANCE IMPROVEMENT
• Typical performance improvement that buyer expects from a supplier are: ? Lead-Time reduction ? Quality Improvement ? Cost reduction of the component through better processes and technology • But in the normal contracts, the benefits of the performance goes to the buyer but the effort has to be made by the supplier. • Buyers can encourage performance improvement initiatives from the suppliers by sharing the benefits. For example: ? If the lead time is reduced from 30 days to 15 days, suppliers get 2% upward revision. ?If the quality rejection reduces from 3% to 1%, suppliers get 1% upward revision. • Shared savings contracts are effective in aligning supplier and buyer incentives when the supplier is required to improve performance along a particular dimensions and the benefits goes to the buyer. • Buyers may couple shared savings with penalties for lack of improvement.
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Design Collaboration
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DESIGN COLLABORATION
• Design collaboration is important mainly for 2 reasons: ? 80% of the component cost is fixed at the design stage ? 60-70% of the OEM’s product costs is through bought-outs as against 20-30% about 2 decades back. • Design collaboration significantly reduces the product development time. • Design collaboration also reduces the product development costs. For example, if Tata Motors can find a vendor who can design and produce different types of seats, it will reduce the design and development costs of the seat. • A survey by the Procurement and Supply Chain Benchmarking Consortium at Michigan State University found out that successful Design Collaboration: ? Reduces Development costs by 20% ? Improve Quality by 30% ? Reduces Time-to-market by 50%
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DESIGN COLLABORATION
• Suppliers should be involved early in the design phase. • Key themes must be communicated to suppliers as they play a bigger role in design. • It could be design for logistics or design for manufacturability etc. • Design for Logistics: ? Design for logistics attempts to reduce transportation, handling and inventory costs. ? To reduce transportation and handling costs, the manufacturer must convey expected order sizes. ? Packages can then be designed so that the transportation cost is lowered and handling is minimized. ? To reduce transportation cost, packaging is kept as compact as possible and designed to ensure easy stacking. ? To reduce handling costs, package sizes are designed to minimize the need to break the carton till the last point.
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DESIGN COLLABORATION
• Design for Logistics: ? Inventory costs can be reduced by principle of Commonization and postponement. Most of the parts are common between different variants and the dissimilar parts are assembled in the end. This is quite common in auto industry.
• Design for Manufacturability: ? Design for manufacturability attempts to design products for ease of manufacture.
Some key principles are:
? Eliminating right-hand and left-hand parts ? Using catalog parts rather than designing a new part ?Designing parts to provide access for other parts and tools
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Procurement
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PROCUREMENT PROCESS
• Procurement process begin with buyer placing the order and end with the buyer receiving and paying for the order. • There are 2 ways to categorize purchases – ?Direct and Indirect, ?Based on their position in the value/cost and Criticality • Direct Materials: Components used to make finished goods (Ex: Seat for the car for an automobile manufacturer) • Indirect Materials: Goods used to support the operations of the firm (PC for an automobile manufacturer) • It is always desirable to aggregate orders by product and supplier for both direct and indirect material purchase. • For direct materials, the consolidation of orders improves economies of scale at the supplier and during transport and allow to realize the benefit of quantitative discounts. • For indirect materials, the consolidation allows the firm to negotiate better discounts. 31 31
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PROCUREMENT PROCESS • Direct Material Procurement:
? Primary goal of direct material procurement is to match the supply and demand. ? Process should be designed to increase visibility. ? Procurement plans and component inventory at the manufacturer end should be made visible to the supplier. Visibility allows suppliers to schedule component production to match the needs of the manufacturer. ? Similarly, available capacity at the supplier’s end should be made visible to the manufacturer. ? Procurement process should have built in alerts that warn both the buyer and the supplier of potential mismatches between supply and demand. • Indirect Material Procurement: ? Primary goal of indirect material procurement is to reduce the transaction costs. ? E-procurement process and reverse auction is more suitable for indirect material purchase. 32 32
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PROCUREMENT PROCESS • Product Categorization by Value and Criticality
High Critical Items Strategic Items
Critical
General Items
Bulk Purchase Items
Low
Value / Cost
High
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PROCUREMENT PROCESS • Product Categorization by Value and Criticality
• Purchasing objectives vary for each categories of items. • For general items, the objective should be to lower the transaction cost or cost of
acquisition
•For bulk purchase items, the objective is to lower the cost but through well defined auctions (Ex: Packaging Materials, Bulk Chemicals etc) •For Critical items, the objective is to have high degree of product availability and not to reduce the costs •For Strategic items, the objective should be to have good buyer/supplier relationship and design collaboration
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Planning and Analysis
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SOURCING PLANNING AND ANALYSIS
• Procurement spending should be analyzed by part and supplier to ensure appropriate economies of scale.
• A simple step is to consolidate spending and ensure that the firm’s economic
order quantity matches with the supplier’s economic production quantity. • Supplier performance analysis should be used to build a portfolio of suppliers with complementary strengths. For example: ? Cheaper but low performing suppliers may be used to fulfill the base demand. ? Higher performing but more expensive suppliers may be used to buffer against variation in demand and supply
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BEST PRACTICES IN SOURCING
• Multifunctional Teams for strategy formulation: ?Effective strategy for sourcing result from multifunctional collaboration
within the firm.
?A sourcing strategy from the purchasing group is likely to be narrow and focus on purchase price. ?A strategy developed with the collaboration of purchasing, manufacturing, engineering and planning is much more likely to identify the correct drivers of total cost. • Coordination across regions and business units
• Evaluation of Total Cost of Ownership
• Long-term relationships with key suppliers
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Framework for Make or Buy Decisions
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FRAMEWORK FOR MAKE / BUY DECISIONS
• How can the firm decide on which component to manufacture and which to outsource. • Consultants and Supply Chain experts typically suggest to focus on core competencies. • But how can the firm identify what is core and hence should be made internally and what is outside the core, and hence should be purchased from outside suppliers. • To understand the framework developed by Fine and Whitney, it is important to know certain terminologies: ? Dependency on Capacity
? Dependency on Knowledge
? Modular product ? Integral Product
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FRAMEWORK FOR MAKE / BUY DECISIONS
• Dependency on Capacity: ? In this case, the firm has the knowledge and the skills required to produce the component but for various reasons decides to outsource • Dependency on Knowledge: ? In this type of dependency, the company does not have the people, skills
and knowledge required to produce the component and outsources in order
to have these capabilities.
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FRAMEWORK FOR MAKE / BUY DECISIONS
• Toyota Example: ? Toyota designs and manufactures about 30% of its car components ? Toyota has both the knowledge and the capacity to produce its engines and 100% of the engines are produced internally
? For transmissions, the company has the knowledge and indeed designs all the
components but depends on its suppliers’ capacities. ?Vehicle electronic systems are designed and produced by Toyota’s suppliers. In this case the firm has a dependency on both capacity and knowledge
Fine and Whitney observed that “Toyota seems to vary its outsourcing practice depending on the strategic role of the components and subsystems”. The more important the component is, the smaller the dependency on knowledge or capacity”
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FRAMEWORK FOR MAKE / BUY DECISIONS
• Modular vs Integral Product: ? Modular Product: ? A modular product can be made by combining different components. For example , in a personal computer a customer can specify memory and hard-drive sizes, monitor, software etc. ?Components are independent of each other ?Components are interchangeable
?A component can be designed or upgraded with little or no regards to
other components ?Customer preference determines the product configuration
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FRAMEWORK FOR MAKE / BUY DECISIONS
• Modular vs Integral Product: ? Integral Product: ? Integral product is made up from components whose functionalities are tightly related ?Integral products are not made from off-the-shelf components ?Integral products are designed as a system by taking a top-down design approach
?Integral products are evaluated based on system performance, not based on
component performance
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FRAMEWORK FOR MAKE / BUY DECISIONS
• Modular vs Integral Product: ? In real life, very few products are either modular or integral. ?The degree of modularity or integrality vary with personal computers being on one end which are highly modular and airplanes on the other end which are highly integral.
? Even a car is a product that includes many modular components
like Stereo systems.
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FRAMEWORK FOR MAKE / BUY DECISIONS
Framework:
Product
Dependency on Knowledge and Capacity
Outsourcing is risky
Independent for Knowledge, dependency for capacity
Outsourcing is an opportunity
Independent for knowledge and capacity
Opportunity to reduce cost through outsourcing Keep production internal
Modular
Integral
Outsourcing is very Outsourcing is an risky option
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FRAMEWORK FOR MAKE / BUY DECISIONS
Explanation for Framework: • For modular products, ?capturing knowledge is important, whereas having the production capacity in-house is less critical. For example, for a PC manufacturer, capturing knowledge may refer to
the design of the various components. If the firm has the knowledge, outsourcing the
manufacturing process provides an opportunity to reduce cost. ?If the firm has neither knowledge or capacity, outsourcing may be a risky strategy as the knowledge developed by the supplier may be transferred to a competitor’s products.
• For integral products,
?capturing both knowledge and capacity is important as long as it is possible to have both. ?If the firm has both the knowledge and the capacity, then in-house production is
appropriate.
?If the firm does not have both, it is in the wrong business
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3 PL and 4 PL
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What is 3 PL?
• 3 PL of third-party logistics is simply the use of an outside company to perform all or most of the firm’s materials management and product distribution functions. • 3 PL relationships are typically more complex than traditional logistics supplier
relationships: they are true strategic alliances
• Although companies have used firms to provide particular services, such as trucking and warehousing, these relationships had two typical characteristics. ? They were transaction based
? The companies hired were often single-function specific
• Modern 3 PL arrangements involve long-term commitments and often multiple functions or process management. • 3 PL providers can manage many stages of the supply chain.
• Use of 3 PL is most prevalent among large companies and less prevalent among small
companies though this has been changing.
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ADVANTAGES OF 3 PL
• Focus on Core Strengths:
? Most frequently cited benefit of using 3 PL providers is that it allows a company to focus on its core competencies. ?With corporate resources becoming increasingly limited, it is often difficult to be an
expert in every facet of the business.
? 3 PL companies provide a company with the opportunity to focus on that company’s particular area of expertise, leaving the logistics expertise to 3 PL companies. ?Example is the arrangement between Ryder and General Motors’ Saturn division: ? Saturn focuses on automobile manufacturing and Ryder manages most of the Saturn’s other logistics considerations. ?Ryder deals with vendors, delivers parts to the Saturn factory and delivers finished vehicles to the dealers. ?Saturn orders parts using electronic data interchange (EDI) and sends the same information to Ryder. ?Ryder makes all the necessary pickups from 300 suppliers in the United States, Canada and Mexico, using special decision-support software to effectively plan routes to minimize transportation costs.
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ADVANTAGES OF 3 PL
• Provides Technological Flexibility: ? The ever-increasing need for technological flexibility is another important advantage of the use of 3PL providers. ?Better 3 PL providers constantly update their information technology and equipment. ?Individual companies do not have the time, resources or expertise to constantly update their technology. ?Third-party logistics providers can often meet these requirements in a quicker, more costeffective way. • Provides Other Flexibility: ? 3 PLs also may provide greater flexibility like geographic locations. ? Regional warehousing may be required in many cases. ? By utilizing 3 PL providers for this warehousing, company can meet customer requirements without committing capital to construct new facility or committing to a long-term lease. ? Many of the fixed costs can be changed to variable costs in order to react more quickly to changing business conditions
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DISADVANTAGES OF 3 PL
• Loss of control, especially true for outbound logistics where 3 PL employees themselves
might interact with firm’s customers.
• Many third-party logistics firms work very hard to address these concerns. Efforts include painting company logos on the sides of the trucks, dressing 3 PL employees in the uniforms of the hiring company, and providing extensive reporting on each customer interaction. • 3 PL may not be as capable as the firm’s in-house expertise. • Changeover costs and efforts from one 3 PL to another is a very painful process.
• It requires very high level of trust between the company and the 3 PL service providers.
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3 PL ISSUES AND REQUIREMENTS
• A third-party logistics contract is typically a major and complex business decision.
• Other than the pros and cons listed above, there are many considerations that are critical in
deciding whether an agreement should be entered into with a particular 3 PL provider: ? Knowing one’s costs: ?Among the most basic issues to consider in selecting a 3 PL provider is to know the company’s own costs so they can be compared with the cost of using an outsourcing firm. ?It is necessary to use activity-based costing techniques, which involve tracing
overhead and direct costs back to specific products and services.
? Customer orientation of the 3PL: ? Apart from costs, many of the advantages of 3 PL are intangibles such as flexibility.
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3 PL ISSUES AND REQUIREMENTS
• Customer orientation of the 3PL: ? There should be alignment between the strategic logistics plan of the company and 3 PL provider’s fit into this strategy. ?The success of the 3PL relationship is directly related to the ability of the provider to understand the needs of the hiring firm and to adapt its services to the special requirements of the firm.
?Reliability and flexibility to meet the hiring company’s business expectations are
the other major factors. • Specialization of the 3PL: ? It is important the companies should consider 3 PLs whose roots lie in the particular area of logistics. ? Some firms have even more specialized requirements, and these should be
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considered carefully when choosing a 3 PL partner.
3 PL ISSUES AND REQUIREMENTS
• Asset-owning versus non-asset owning 3PL: ? There are advantages and disadvantages to utilizing an asset-owning versus a non-asset owning 3 PL company. ?Asset-owning companies have significant size, access to human resources, a large customer base, economies of scale and systems in place but they may tend to favor their own divisions in awarding work and to have a long-decision making cycle.
?Non-asset owning companies may be more flexible and able to tailor services and
have the freedom to mix and match providers. They may have low overhead costs but limited resources and lower bargaining power.
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3 PL IMPLEMENTATION ISSUES
• First 6 months to a year is both the most difficult and the most critical part of any 3 PL alliance. • The company purchasing the services must identify exactly what it needs for the relationship to be successful. • Effective communication within the company and between the company and the 3PL is important.
• The third party and its service providers must respect the confidentiality of the data.
• Specific performance measures must be agreed upon. • Specific criteria regarding subcontractors should be discussed. • Arbitration issues should be considered before entering into a contract. • Exit clauses should be negotiated into the contract.
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4 PL
• 4 PL is the lead logistics who will bring value and reengineered approach to the customer’s need. • Typically, 4 PL will not provide the service directly but use other 3 PLs to actually execute
the logistics requirements.
• A 4PL wants to position itself as an extension of and part of its customer. • A good 4PL will have the shipper perspective and experience in what he does and offers to prospective customers. That means a better understanding of the complexity of the
customer’s requirements, present viable solutions and to have customer satisfaction and
retention • 4 PL typically focus on the following questions: ? Is there really a process in place--or
?a series of standalone transactions?
?What is the present process? How does it work? ?Where does it fail? Where are there gaps? Where are there redundancies?
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doc_129873765.pptx
It also explains different types of supplier contracts like buyback contracts, revenue sharing contracts, quantity flexibility contracts. It also explains the framework for make or buy decisions. It also explains what is 3PL and 4 PL.
Sourcing in Supply Chain
1
GLOBAL
Purchasing vs Sourcing
• Purchasing or procurement is the process by which companies acquire raw materials, components, products, services and other resources from suppliers to execute their operations. • Sourcing is the entire set of business processes required to purchase goods and services
Key Sourcing Related Processes
Supplier Selection and Supplier scoring Contract and Assessment Negotiation
Design Collaboration
Procurement
Sourcing Planning and Analysis
2 2
GLOBAL
Supplier Scoring and Assessment
3 3
GLOBAL
SUPPLIER SCORING AND ASSESSMENT:
• Supplier scoring and assessment is the process used to rate supplier performance • Traditionally, quoted price has been the only dimension that suppliers have been compared on. • This was a mistake as the Total cost of using a supplier may differ from the quoted
price. Lowest quoted price supplier may be highest on Total Cost. Some examples
are: ? If the supplier take a longer lead time, the company may have to keep higher inventory as against another who has a lower lead time. ? If the supplier has poor on-time deliver performance, then there could be loss of sales which should be added to the Total Cost.
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GLOBAL
PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
• Replenishment lead time • On-time performance • Supply flexibility • Delivery frequency / minimum lot size
• Quality
• Inbound Transportation cost • Pricing terms • Information coordination capability • Design collaboration capability • Exchange rates, taxes and duties • Supplier viability
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GLOBAL
PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Replenishment lead time: • As the replenishment lead time from a supplier grows, the amount of safety
inventory that need to be held by the buyer grows proportional to the square
root of the lead time.
On-time performance:
• On-time performance affects the variability of the lead time. • A reliable supplier has low variability of lead time where as an unreliable supplier has high variability. • Higher variability in lead time lead to: ? Increase in Safety stock ? Increase in loss of sales
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Supplier Flexibility: • Supply flexibility is the amount of variation in order quantity that a supplier can tolerate keeping other things constant.
• Greater the flexibility, lesser is cost due to forecast inaccuracy and lesser the total
cost Delivery Frequency / Minimum Lot size: • Higher the lot size higher is the safety stock and cycle inventory • It is desirable to have a supplier who can supply with minimum lot size
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Supply Quality: • Poor quality lead to increase in rejections. • Inventory holding increases while dealing with poor quality suppliers
• Quality also impacts customer satisfaction and product cost because of rework,
material loss and inspection cost. Inbound Transportation Cost: • Total cost includes the inbound transportation cost of bringing material in from the supplier. • Sourcing a product overseas may have lower product cost but may increase the inbound transportation cost. • Also, longer the distance, higher the lead time and inventory holding.
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Pricing Terms: • Pricing terms typically include credit period and discounts. • Higher credit period reduces the required working capital.
• Higher quantity discount reduces the direct cost but will increase the inventory
holding cost Information Coordination Capability:
• Good coordination will result in better replenishment planning, decreasing both
the inventory carried as well as lost sales. • Information capability reduce the transaction costs. • It improves visibility in the supply chain.
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GLOBAL
PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Design Collaboration Capability: • Design collaboration capability is becoming increasingly important. • Large part of the product cost is fixed at design. Design collaboration capability for manufacturability and supply chain will reduce the overall cost Exchange Rates, Taxes and Duties: • Exchange rates, taxes and duties can be significant for a firm with a global manufacturing and supply base. • Currency fluctuations may impact component price more than all other factors put together. • Financial hedges can be used to counter exchange rate fluctuations. • Level of taxes and duties will have an impact on total cost.
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PARAMETERS FOR SUPPLIER SCORING AND ASSESSMENT:
Supplier Viability: • Supplier should be in a sound financial health. • If the supplier supplying critical items go broke, it could shut down the whole operations of the company.
• Also, the supplier should have the capability to make investments to support the
company’s expansion plans.
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SUPPLIER PERFORMANCE FACTORS AND THEIR IMPACT ON TOTAL COST
Factors Purchase Price Inventory Transportation Cost Product Introduction Time
Replenishment Lead Time On-Time performance Supply Flexibility Delivery Frequency Quality Inbound Transportation Cost Pricing Terms Information Coordination Design Collaboration Exchange Rates and Taxes Supplier Viability
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X X X X X X X X X X X X X X X X X X
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Supplier Selection and Contracts
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GLOBAL
SUPPLIER SELECTION AND CONTRACTS:
• Based on scores of different suppliers in the assessment, companies shortlist the suppliers. • Final selection are based on the total cost.
• Companies selects suppliers based on it’s policy of
? Single Sourcing or ? Multi Sourcing • Single Sourcing:
? Single sourcing guarantees the suppliers sufficient business and the suppliers would be
more forthcoming to make buyer-specific investments for the company. ? Buyer-specific investments can be in the form of plant or machinery or it could be in the form of certain specific skills.
? Single sourcing is predominantly used in auto industry and started by Japanese
companies.
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GLOBAL
SUPPLIER SELECTION AND CONTRACTS:
• Single Sourcing: ? Single sourcing increases the risk and make the company too dependent on the supplier. • Multi Sourcing: ? Increases the transaction costs. ? Less readiness on the part of supplier to make major investments for the buyer. ? Reduces the dependency on the supplier. ? Increase competition between different suppliers which may reduce the direct cost.
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GLOBAL
SUPPLIER SELECTION AND CONTRACTS:
• Structuring Contracts: ? Once the suppliers have been selected, contracts have to be structured between the buyer and each supplier.
? A supply contract specifies parameters governing the buyer-supplier
relationship. ? Contracts should be designed to facilitate desirable supply chain outcomes and minimize actions that hurt performance.
? The objective of a contract should be to:
? To improve availability and supply chain profits ? To discourage information distortion ? To get the best performance from the supplier
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GLOBAL
SUPPLIER SELECTION AND CONTRACTS:
• Contracts for Product Availability and Supply Chain Profits: ? Many shortcomings in supply chain performance occur because the buyer and supplier are two different entities, each trying to optimize their own profits. ? Action taken by two parties in the supply chain thus results in profits that are lower than the what would have been if they had worked with a common objective. This is called as Double Marginalization. ? Examples of Double Marginalization: ? If the supplier has higher bargaining power, he may force the buyer to buy in large quantities with high lead time. There would be increase in inventory holding cost and expiry of inventory which would reduce the overall profit. ? If the buyer has higher bargaining power, he may force the supplier to supply in minimum lot size and shorter lead times. Supplier may have to keep higher amounts of inventory than normally required. Again this would reduce the overall profit.
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GLOBAL
SUPPLIER SELECTION AND CONTRACTS:
• Three contracts that increase overall profits are:
? Buy-back of return contracts
? Revenue sharing contracts ? Quantity flexibility contracts
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GLOBAL
BUYBACK CONTRACTS:
• A buyback or returns clause in a contract allows a retailer unsold inventory up
to a specified amount at an agreed upon price within a specified time.
• Buyback improves the product availability. • Inventory expiry costs is shared between manufacturer and the supplier. • Buyback contracts are most effective for products with low variable costs (Ex; music, books, newspapers, software etc)
• Instead of buying back, supplier may allow higher discounts to sell the product.
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GLOBAL
DOWNSIDE OF BUYBACK CONTRACTS:
• Higher Inventory and Return Costs:
? Leads to over-ordering by manufacturers to improve product availability.
? Increase in return costs
• Less Sales Effort:
? If there is no buy-back, managers put all their effort to sell their product. ?With the buy-back, there may be a slackness in the effort. • Information distortion: ? Without a buy-back policy, manufacturer places order based on forecast or customer
order.
? With buy-back policy, managers tend to place larger than the actual requirement. ?In effect supplier will be producing against retailer’s order which may not be indicative of the actual demand
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GLOBAL
REVENUE-SHARING CONTRACTS:
• In a revenue sharing contract, the buyer pays a minimal amount for each unit
purchased from the supplier but shares a fraction of the revenue from each unit sold.
• Revenue sharing contracts have a similar effect as buyback contracts in: ? improving product availability ? Lessening the sales effort ? Higher Inventory ? Information distortion • Unlike buyback, revenue sharing do not increase the cost of returns.
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GLOBAL
QUANTITY FLEXIBILITY CONTRACTS:
• A quantity flexibility contract clause allows the buyer to modify the order (with certain
range) as demand visibility increase closer to the point.
• A typical example of quantity flexibility contract is: ? Manufacturer give 3 month rolling plan to the supplier. ? First month is firm where no change is quantity is allowed.
? Second month plan can be modified by + or – 10%
? Third month plan can be modified by + or – 20% • Supplier dispatches only the modified quantity • The amount ordered by the manufacturer will be more in line with actual demand
resulting in higher profits for the supply chain.
• Quantity flexibility contracts are preferred for products with high marginal cost or in instances where surplus capacity is available. • Quantity flexibility contracts leads to less information distortion.
• Downside of these contracts is they may lead to higher levels of long-term forecasting
inaccuracy
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GLOBAL
CONTRACTS TO INCREASE AGENT EFFORT
• Two-part tariffs / threshold contracts can be used to counter double marginalization and
increase agent effort in supply chain.
• For example, consider 2 situation: ? A company pays a fixed amount as margin to the retailer irrespective of the quantities sold or
? A company pays a fixed amount but pays more if the quantity sold crosses a limited
threshold. (It pays 5% each for sale of 1000 units whose cost is Rs. 100 but pays 7% for anything sold above 1000 units) ? Generally, in the second case, the retailer will make more effort.
• This may also lead to increase in demand variability. For example, if the retailer knows
that there is a demand for 2000 in the next 2 months: ? If he sells 1000 pieces in each month, he will get he will get Rs. 5000 per month and a Total of Rs. 10,000 in 2 months.
? If he sells 500 pieces in the first month and 1500 in the second month, he will get Rs.
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2500 for first month sales, Rs. 8500 for the second month and a total of Rs. 11,000
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CONTRACTS TO INCREASE AGENT EFFORT
• To overcome the information distortion, company can: ? Go for rolling horizon. Ex. Retailer have to cross 1000 units for 3 consecutive months to get the quantity incentive ? Penalize the under performance while incentivising the higher performance. Ex. Retailer will get ? 5% if he sells 900 to 1000 units a month, ? 3% if he sells less than 900 units a month ? 7% if he sells more than 1000 units a month
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GLOBAL
CONTRACTS TO INDUCE PERFORMANCE IMPROVEMENT
• Typical performance improvement that buyer expects from a supplier are: ? Lead-Time reduction ? Quality Improvement ? Cost reduction of the component through better processes and technology • But in the normal contracts, the benefits of the performance goes to the buyer but the effort has to be made by the supplier. • Buyers can encourage performance improvement initiatives from the suppliers by sharing the benefits. For example: ? If the lead time is reduced from 30 days to 15 days, suppliers get 2% upward revision. ?If the quality rejection reduces from 3% to 1%, suppliers get 1% upward revision. • Shared savings contracts are effective in aligning supplier and buyer incentives when the supplier is required to improve performance along a particular dimensions and the benefits goes to the buyer. • Buyers may couple shared savings with penalties for lack of improvement.
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GLOBAL
Design Collaboration
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GLOBAL
DESIGN COLLABORATION
• Design collaboration is important mainly for 2 reasons: ? 80% of the component cost is fixed at the design stage ? 60-70% of the OEM’s product costs is through bought-outs as against 20-30% about 2 decades back. • Design collaboration significantly reduces the product development time. • Design collaboration also reduces the product development costs. For example, if Tata Motors can find a vendor who can design and produce different types of seats, it will reduce the design and development costs of the seat. • A survey by the Procurement and Supply Chain Benchmarking Consortium at Michigan State University found out that successful Design Collaboration: ? Reduces Development costs by 20% ? Improve Quality by 30% ? Reduces Time-to-market by 50%
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GLOBAL
DESIGN COLLABORATION
• Suppliers should be involved early in the design phase. • Key themes must be communicated to suppliers as they play a bigger role in design. • It could be design for logistics or design for manufacturability etc. • Design for Logistics: ? Design for logistics attempts to reduce transportation, handling and inventory costs. ? To reduce transportation and handling costs, the manufacturer must convey expected order sizes. ? Packages can then be designed so that the transportation cost is lowered and handling is minimized. ? To reduce transportation cost, packaging is kept as compact as possible and designed to ensure easy stacking. ? To reduce handling costs, package sizes are designed to minimize the need to break the carton till the last point.
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GLOBAL
DESIGN COLLABORATION
• Design for Logistics: ? Inventory costs can be reduced by principle of Commonization and postponement. Most of the parts are common between different variants and the dissimilar parts are assembled in the end. This is quite common in auto industry.
• Design for Manufacturability: ? Design for manufacturability attempts to design products for ease of manufacture.
Some key principles are:
? Eliminating right-hand and left-hand parts ? Using catalog parts rather than designing a new part ?Designing parts to provide access for other parts and tools
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GLOBAL
Procurement
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GLOBAL
PROCUREMENT PROCESS
• Procurement process begin with buyer placing the order and end with the buyer receiving and paying for the order. • There are 2 ways to categorize purchases – ?Direct and Indirect, ?Based on their position in the value/cost and Criticality • Direct Materials: Components used to make finished goods (Ex: Seat for the car for an automobile manufacturer) • Indirect Materials: Goods used to support the operations of the firm (PC for an automobile manufacturer) • It is always desirable to aggregate orders by product and supplier for both direct and indirect material purchase. • For direct materials, the consolidation of orders improves economies of scale at the supplier and during transport and allow to realize the benefit of quantitative discounts. • For indirect materials, the consolidation allows the firm to negotiate better discounts. 31 31
GLOBAL
PROCUREMENT PROCESS • Direct Material Procurement:
? Primary goal of direct material procurement is to match the supply and demand. ? Process should be designed to increase visibility. ? Procurement plans and component inventory at the manufacturer end should be made visible to the supplier. Visibility allows suppliers to schedule component production to match the needs of the manufacturer. ? Similarly, available capacity at the supplier’s end should be made visible to the manufacturer. ? Procurement process should have built in alerts that warn both the buyer and the supplier of potential mismatches between supply and demand. • Indirect Material Procurement: ? Primary goal of indirect material procurement is to reduce the transaction costs. ? E-procurement process and reverse auction is more suitable for indirect material purchase. 32 32
GLOBAL
PROCUREMENT PROCESS • Product Categorization by Value and Criticality
High Critical Items Strategic Items
Critical
General Items
Bulk Purchase Items
Low
Value / Cost
High
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GLOBAL
PROCUREMENT PROCESS • Product Categorization by Value and Criticality
• Purchasing objectives vary for each categories of items. • For general items, the objective should be to lower the transaction cost or cost of
acquisition
•For bulk purchase items, the objective is to lower the cost but through well defined auctions (Ex: Packaging Materials, Bulk Chemicals etc) •For Critical items, the objective is to have high degree of product availability and not to reduce the costs •For Strategic items, the objective should be to have good buyer/supplier relationship and design collaboration
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GLOBAL
Planning and Analysis
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GLOBAL
SOURCING PLANNING AND ANALYSIS
• Procurement spending should be analyzed by part and supplier to ensure appropriate economies of scale.
• A simple step is to consolidate spending and ensure that the firm’s economic
order quantity matches with the supplier’s economic production quantity. • Supplier performance analysis should be used to build a portfolio of suppliers with complementary strengths. For example: ? Cheaper but low performing suppliers may be used to fulfill the base demand. ? Higher performing but more expensive suppliers may be used to buffer against variation in demand and supply
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GLOBAL
BEST PRACTICES IN SOURCING
• Multifunctional Teams for strategy formulation: ?Effective strategy for sourcing result from multifunctional collaboration
within the firm.
?A sourcing strategy from the purchasing group is likely to be narrow and focus on purchase price. ?A strategy developed with the collaboration of purchasing, manufacturing, engineering and planning is much more likely to identify the correct drivers of total cost. • Coordination across regions and business units
• Evaluation of Total Cost of Ownership
• Long-term relationships with key suppliers
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GLOBAL
Framework for Make or Buy Decisions
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
• How can the firm decide on which component to manufacture and which to outsource. • Consultants and Supply Chain experts typically suggest to focus on core competencies. • But how can the firm identify what is core and hence should be made internally and what is outside the core, and hence should be purchased from outside suppliers. • To understand the framework developed by Fine and Whitney, it is important to know certain terminologies: ? Dependency on Capacity
? Dependency on Knowledge
? Modular product ? Integral Product
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
• Dependency on Capacity: ? In this case, the firm has the knowledge and the skills required to produce the component but for various reasons decides to outsource • Dependency on Knowledge: ? In this type of dependency, the company does not have the people, skills
and knowledge required to produce the component and outsources in order
to have these capabilities.
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
• Toyota Example: ? Toyota designs and manufactures about 30% of its car components ? Toyota has both the knowledge and the capacity to produce its engines and 100% of the engines are produced internally
? For transmissions, the company has the knowledge and indeed designs all the
components but depends on its suppliers’ capacities. ?Vehicle electronic systems are designed and produced by Toyota’s suppliers. In this case the firm has a dependency on both capacity and knowledge
Fine and Whitney observed that “Toyota seems to vary its outsourcing practice depending on the strategic role of the components and subsystems”. The more important the component is, the smaller the dependency on knowledge or capacity”
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
• Modular vs Integral Product: ? Modular Product: ? A modular product can be made by combining different components. For example , in a personal computer a customer can specify memory and hard-drive sizes, monitor, software etc. ?Components are independent of each other ?Components are interchangeable
?A component can be designed or upgraded with little or no regards to
other components ?Customer preference determines the product configuration
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
• Modular vs Integral Product: ? Integral Product: ? Integral product is made up from components whose functionalities are tightly related ?Integral products are not made from off-the-shelf components ?Integral products are designed as a system by taking a top-down design approach
?Integral products are evaluated based on system performance, not based on
component performance
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
• Modular vs Integral Product: ? In real life, very few products are either modular or integral. ?The degree of modularity or integrality vary with personal computers being on one end which are highly modular and airplanes on the other end which are highly integral.
? Even a car is a product that includes many modular components
like Stereo systems.
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GLOBAL
FRAMEWORK FOR MAKE / BUY DECISIONS
Framework:
Product
Dependency on Knowledge and Capacity
Outsourcing is risky
Independent for Knowledge, dependency for capacity
Outsourcing is an opportunity
Independent for knowledge and capacity
Opportunity to reduce cost through outsourcing Keep production internal
Modular
Integral
Outsourcing is very Outsourcing is an risky option
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FRAMEWORK FOR MAKE / BUY DECISIONS
Explanation for Framework: • For modular products, ?capturing knowledge is important, whereas having the production capacity in-house is less critical. For example, for a PC manufacturer, capturing knowledge may refer to
the design of the various components. If the firm has the knowledge, outsourcing the
manufacturing process provides an opportunity to reduce cost. ?If the firm has neither knowledge or capacity, outsourcing may be a risky strategy as the knowledge developed by the supplier may be transferred to a competitor’s products.
• For integral products,
?capturing both knowledge and capacity is important as long as it is possible to have both. ?If the firm has both the knowledge and the capacity, then in-house production is
appropriate.
?If the firm does not have both, it is in the wrong business
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GLOBAL
3 PL and 4 PL
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What is 3 PL?
• 3 PL of third-party logistics is simply the use of an outside company to perform all or most of the firm’s materials management and product distribution functions. • 3 PL relationships are typically more complex than traditional logistics supplier
relationships: they are true strategic alliances
• Although companies have used firms to provide particular services, such as trucking and warehousing, these relationships had two typical characteristics. ? They were transaction based
? The companies hired were often single-function specific
• Modern 3 PL arrangements involve long-term commitments and often multiple functions or process management. • 3 PL providers can manage many stages of the supply chain.
• Use of 3 PL is most prevalent among large companies and less prevalent among small
companies though this has been changing.
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ADVANTAGES OF 3 PL
• Focus on Core Strengths:
? Most frequently cited benefit of using 3 PL providers is that it allows a company to focus on its core competencies. ?With corporate resources becoming increasingly limited, it is often difficult to be an
expert in every facet of the business.
? 3 PL companies provide a company with the opportunity to focus on that company’s particular area of expertise, leaving the logistics expertise to 3 PL companies. ?Example is the arrangement between Ryder and General Motors’ Saturn division: ? Saturn focuses on automobile manufacturing and Ryder manages most of the Saturn’s other logistics considerations. ?Ryder deals with vendors, delivers parts to the Saturn factory and delivers finished vehicles to the dealers. ?Saturn orders parts using electronic data interchange (EDI) and sends the same information to Ryder. ?Ryder makes all the necessary pickups from 300 suppliers in the United States, Canada and Mexico, using special decision-support software to effectively plan routes to minimize transportation costs.
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ADVANTAGES OF 3 PL
• Provides Technological Flexibility: ? The ever-increasing need for technological flexibility is another important advantage of the use of 3PL providers. ?Better 3 PL providers constantly update their information technology and equipment. ?Individual companies do not have the time, resources or expertise to constantly update their technology. ?Third-party logistics providers can often meet these requirements in a quicker, more costeffective way. • Provides Other Flexibility: ? 3 PLs also may provide greater flexibility like geographic locations. ? Regional warehousing may be required in many cases. ? By utilizing 3 PL providers for this warehousing, company can meet customer requirements without committing capital to construct new facility or committing to a long-term lease. ? Many of the fixed costs can be changed to variable costs in order to react more quickly to changing business conditions
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DISADVANTAGES OF 3 PL
• Loss of control, especially true for outbound logistics where 3 PL employees themselves
might interact with firm’s customers.
• Many third-party logistics firms work very hard to address these concerns. Efforts include painting company logos on the sides of the trucks, dressing 3 PL employees in the uniforms of the hiring company, and providing extensive reporting on each customer interaction. • 3 PL may not be as capable as the firm’s in-house expertise. • Changeover costs and efforts from one 3 PL to another is a very painful process.
• It requires very high level of trust between the company and the 3 PL service providers.
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3 PL ISSUES AND REQUIREMENTS
• A third-party logistics contract is typically a major and complex business decision.
• Other than the pros and cons listed above, there are many considerations that are critical in
deciding whether an agreement should be entered into with a particular 3 PL provider: ? Knowing one’s costs: ?Among the most basic issues to consider in selecting a 3 PL provider is to know the company’s own costs so they can be compared with the cost of using an outsourcing firm. ?It is necessary to use activity-based costing techniques, which involve tracing
overhead and direct costs back to specific products and services.
? Customer orientation of the 3PL: ? Apart from costs, many of the advantages of 3 PL are intangibles such as flexibility.
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3 PL ISSUES AND REQUIREMENTS
• Customer orientation of the 3PL: ? There should be alignment between the strategic logistics plan of the company and 3 PL provider’s fit into this strategy. ?The success of the 3PL relationship is directly related to the ability of the provider to understand the needs of the hiring firm and to adapt its services to the special requirements of the firm.
?Reliability and flexibility to meet the hiring company’s business expectations are
the other major factors. • Specialization of the 3PL: ? It is important the companies should consider 3 PLs whose roots lie in the particular area of logistics. ? Some firms have even more specialized requirements, and these should be
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considered carefully when choosing a 3 PL partner.
3 PL ISSUES AND REQUIREMENTS
• Asset-owning versus non-asset owning 3PL: ? There are advantages and disadvantages to utilizing an asset-owning versus a non-asset owning 3 PL company. ?Asset-owning companies have significant size, access to human resources, a large customer base, economies of scale and systems in place but they may tend to favor their own divisions in awarding work and to have a long-decision making cycle.
?Non-asset owning companies may be more flexible and able to tailor services and
have the freedom to mix and match providers. They may have low overhead costs but limited resources and lower bargaining power.
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3 PL IMPLEMENTATION ISSUES
• First 6 months to a year is both the most difficult and the most critical part of any 3 PL alliance. • The company purchasing the services must identify exactly what it needs for the relationship to be successful. • Effective communication within the company and between the company and the 3PL is important.
• The third party and its service providers must respect the confidentiality of the data.
• Specific performance measures must be agreed upon. • Specific criteria regarding subcontractors should be discussed. • Arbitration issues should be considered before entering into a contract. • Exit clauses should be negotiated into the contract.
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4 PL
• 4 PL is the lead logistics who will bring value and reengineered approach to the customer’s need. • Typically, 4 PL will not provide the service directly but use other 3 PLs to actually execute
the logistics requirements.
• A 4PL wants to position itself as an extension of and part of its customer. • A good 4PL will have the shipper perspective and experience in what he does and offers to prospective customers. That means a better understanding of the complexity of the
customer’s requirements, present viable solutions and to have customer satisfaction and
retention • 4 PL typically focus on the following questions: ? Is there really a process in place--or
?a series of standalone transactions?
?What is the present process? How does it work? ?Where does it fail? Where are there gaps? Where are there redundancies?
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