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Sourcing Decisions in a Supply Chain - Coggle Diagram
Sourcing Decisions in a Supply Chain
Role of Sourcing
Outsourcing
results in the supply chain function being performed by a third party.
3 keys questions
Will the third party increase the supply chain surplus relative to performing the activity
in-house?
To what extent do risks grow upon outsourcing?
How much of the increase in surplus?
Purchasing
, also called procurement, is the process by which companies acquire raw materials,
components, products, services, or other resources from suppliers to execute their operations.
Sourcing
is the entire set of business processes required to purchase goods and services.
Inhouse or Outsource
The decision to outsource is based on
the growth in supply chain surplus provided by the third
party and the increase in risk incurred by using a third party.
Third parties increase the Supply chain Surplus
Capacity aggregation
aggregating demand across multiple firms and gaining production economies of scale that no single
firm can on its own.
Inventory aggregation.
y aggregating inventories across a large number of customers
Transportation aggregation by transportation intermediaries.
aggregating the transportation function to a higher level than any shipper
can on its own.
Transportation aggregation by storage intermediaries
aggregating inbound and outbound
transportation.
Warehousing aggregation
aggregating warehousing needs over several firms
Receivables aggregation.
aggregate the receivables risk to a higher level than the firm or it has a lower collection cost than
the firm
Procurement aggregation.
Information aggregation
aggregating
information to a higher level than can be achieved by a firm performing the function in-house
Relationship aggregation
decreasing the number of relationships required between multiple buyers and sellers
Lower costs and higher quality
Factors influencing growth of Surplus by a Third party
Scale
Uncertainty
Specificity of assets
Risks of Using a Third Party
The process is broken
Underestimation of the cost of coordination
Reduced customer/supplier contact
Loss of internal capability and growth in third-party power
Leakage of sensitive data and information.
Ineffective contracts.
Loss of supply chain visibility
Negative reputational impact.
Strategic factors in Sourcing
Support the business strategy
Improve firm focus
Total cost of ownership
TCO includes all supply chain costs of sourcing a good or service from a particular supplier and can be considered in three “buckets”—acquisition costs, ownership costs, and post-ownership costs.
Acquisition costs include the supplier price, supplier terms affecting financing costs, taxes and duties, delivery costs, and incoming quality costs, the overhead of managing the relationship and planning the purchases.
Ownership costs include inventory costs, warehousing costs, manufacturing or conversion costs, production quality costs, and production cycle time costs
Post-ownership costs include warranty costs, environmental costs, product liability costs, and reputational costs.
Other costs (for global sourcing): exchange rates, local inflation, labor costs,...
Examples of Successfull third-party suppliers
Supplier Selection—auctions and negotiations
auctions in the Supply chain
the purpose of an auction is to get bidders to reveal their underlying cost structure so the buyer can select the supplier with the lowest costs.
the second-price (Vickrey) auction: A commonly used mechanism that achieves this outcome
Basic principles of negotiation
When?
the total cost of ownership has multiple components besides the cost of acquisition, negotiations generally result in a better outcome compared with the use of auctions.
the bargaining surplus
The difference between the values of the buyer and seller
Goal
ideally create a situation in which the surplus grows, thus increasing the size of the pie they have to share.
Recommendations
to have a clear idea of one’s own value and as good an estimate of the third party’s value as possible.
look for a fair outcome based on equally or equitably dividing the bargaining surplus or dividing it based on needs.
The key to a successful negotiation
make it a win–win outcome that grows the surplus
identify more than one issue to negotiate
Sharing risk and reward in The Supply Chain
Sharing Risk to grow Supply chain profits
Risk Sharing Through Buybacks
Risk Sharing Through Revenue Sharing
Risk Sharing using Quantity flexibility
Sharing rewards to improve performance
The Impact of Incentives when outsourcing
Well-designed incentives can be strong communicators of desired performance. Poorly designed incentives, however, can backfire and hurt supply chain performance.
Designing a Sourcing portfolio: Tailored Sourcing
Onshoring refers to producing the product in the market where it is sold, even when it is a high-cost location.
Near-shoring refers to producing the product at a lower-cost location near the market.
Offshoring refers to producing the product at a low-cost location that may be far from the market.
Most companies need to tailor their supplier portfolio based on a variety of product and market characteristics.
Making sourcing decision in practice
Use multifunctional teams.
Ensure appropriate coordination across regions and business units.
Always evaluate the total cost of ownership.
Build long-term relationships with key suppliers.