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![Page 1: Sourcing Decisions. Chapter Objectives Be able to: Discuss the various strategic issues surrounding sourcing decisions and identify some of the key.](https://reader035.fdocuments.net/reader035/viewer/2022062407/56649e715503460f94b701e3/html5/thumbnails/1.jpg)
Sourcing Decisions
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Chapter Objectives
Be able to: Discuss the various strategic issues surrounding
sourcing decisions and identify some of the key factors favoring one approach over the other.
Perform a simple total cost analysis. Explain what a sourcing strategy is, and show how
portfolio analysis can be used to identify the appropriate sourcing strategy for a particular good or service.
Show how multicriteria decision models can be used to evaluate suppliers, and interpret the results.
Discuss some of the longer-term trends in supply management and why they are important.
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Introduction
• The sourcing decision
• Sourcing strategies
• Supplier evaluation
• Trends in supply management
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• Sourcing decisions – High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners
• Purchasing – discussed in Chapter 11The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance
Sourcing decisions and purchasing activities serve to link a company with its supply chain partners
Focus
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• Insourcing – The use of resources within the firm to provide products or services
• Outsourcing – The use of supply chain partners to provide products or services
Sourcing decisions are high-level, often strategic decisions that address:What will use resources within the firm
What will be provided by supply chain partners
The Sourcing Decision
Make-or-Buy Decision
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Advantages and Disadvantages of Insourcing
Advantages• High degree of control• Ability to oversee the
entire program• Economies of scale
and/or scope
Disadvantages• Required strategic
flexibility• Required high
investment• Loss of access to
superior products and services offered by potential suppliers
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Advantages and Disadvantages of Outsourcing
Advantages• High strategic flexibility• Low investment risk• Improved cash flow• Access to state-of-the-art
products and services
Disadvantages• Possibility of choosing a
bad supplier• Loss of control over the
process and core technologies
• Communication and coordination challenges
• “Hollowing out” of the corporation
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Factors Affecting the Decision to Insource or Outsource
Environmental uncertainty low high
Competition in the supplier market low high
Ability to monitor supplier performance low high
Relationship of product/service to high low buying firm’s core competencies
FactorFavors
InsourcingFavors
Outsourcing
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Total Cost Analysis
A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options
• Direct costs – Costs that are tied directly to the level of operations or supply chain activities
• Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity
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Insourcing and Outsourcing Costs
•Direct material•Direct labor•Freight costs•Variable overhead
•Price (from invoice)•Freight costs
•Supervision•Administrative support•Supplies•Maintenance costs•Equipment depreciation•Utilities•Building lease•Fixed overhead
•Purchasing•Receiving•Quality control
Insourcing Outsourcing
Directcosts
Indirectcosts
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Portfolio Analysis
Bottleneck Critical
Routine Leverage
Value Potential
High
Complexity or Risk Impact
HighLow
Low
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Critical Quadrant
• Critical to profitability and operations
• Few qualified sources of supply
• Large expenditures• Design and quality critical• Complex and/or rigid
specification
• Strategy– Form partnerships with
suppliers
• Tactics– Increase role of selected
suppliers
• Actions– Heavy negotiation– Supplier process
management– Prepare contingency plans– Analyze
market/competitions– Use functional
specifications
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Bottleneck Quadrant
• Complex specifications requiring complex manufacturing or service process
• Few alternate productions/sources of supply
• Big impact on operations/maintenance
• New technology or untested processes
• Strategy– Ensure supply continuity
• Tactics– Decrease uniqueness of
suppliers– Manage supply
• Actions– Widen specification– Increase competition– Develop new suppliers– Medium-term contracts– Attempt competitive
bidding
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Leverage Quadrant
• High expenditures, commodity items
• Large marketplace capacity, ample inventories
• Many alternate products and services
• Many qualified sources of supply
• Market/price sensitive
• Strategy– Maximize commercial
advantage
• Tactics– Concentrate business– Maintain competition
• Actions– Promote competitive
bidding– Exploit market cycles/trends– Procurement coordination– Use industry standards– Active sourcing
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Routine Quadrant
• Many alternative products and services
• Many sources of supply
• Low value, small individual transactions
• Everyday use, unspecified items
• Anyone could buy it
• Strategy– Simplify acquisition
process
• Tactics– Increase role of systems– Reduce buying effort
• Actions– Rationalize supplier base– Automate requisitioning,
e.g., EDI, credit cards– Stockless procurement– Minimize administration
costs– Little negotiating
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• Single sourcing –The buying firm depends on a single company for all or nearly all of an item or service
• Multiple sourcing –The buying firm shares its business across multiple suppliers
• Cross sourcing –Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part
• Dual sourcing –Using two suppliers for the same purchased product or service
Sourcing Strategies
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Multicriteria Decision Models in Sourcing and Purchasing
How do we evaluate alternatives when criteria include both quantitative measures (such as costs and on-time delivery performance) and qualitative
factors (such as management stability and trustworthiness)?
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Weighted-Point Evaluation System - I
• Assign weights to performance dimensions
• Rate the performance of each supplier with regard to each dimension
• Calculate the total score
• Evaluating potential suppliers
• Tracking suppliers’ performance over time
• Ranking current suppliers
Purpose:
The Process:
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$4/unit $5/unit $2/unit
5% defects 1% defects 10% defects
95% on time 80% on time 60% on time
Aardvark Beverly Conan the Electronics Hills Inc. Electrician
Price
Quality
Delivery reliability
Weighted-Point Evaluation System - II
Summary Data for Alternative Suppliers
Performance Dimension
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Weighted-Point Evaluation System - III
5 = excellent
4 = good
3 = average
2 = fair
1 = poor
Scoring Scheme Criteria Weights
WPrice = 0.3
WQuality = 0.4
WDelivery = 0.3
n
YYXYX WePerformancScore
1
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4 3 5
3 5 1
4 2 1
Aardvark Beverly Conan the Electronics Hills Inc. Electrician
Performance Dimension
Price
Quality
Delivery reliability
Weighted-Point Evaluation System - IV
Performance Values for Alternative Suppliers
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Weighted-Point Evaluation System - V
Total Scores for Alternative SuppliersScore Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6
Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5
Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2
Aardvark should improve their qualityBeverly Hills should improve their delivery and priceConan is out of the running as a potential supplier
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Trends in Supply Management
• Sustainable Supply*
• Supply Base Reduction
• Global Sourcing– Supply Chain Disruptions
– Supply Chain Capacity
– Transportation Costs
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Case Study in Sourcing Decisions
Pagoda.Com